Patrick Doyle - President & CEO
Kevin Vasconi - EVP & Chief Information Officer
Rich Allison - EVP, International
Mike Lawton - EVP & CFO
Domino’s Pizza, Inc. (DPZ) 2013 Investor Day Conference Call January 18, 2013 9:00 AM ET
Good morning everybody. I appreciate you coming in and spending the morning with us to get a kind of an update on Domino’s and the Domino’s story. This has become our tradition really to do this once a year, kind of near the beginning of the year really talk about the business, our views on the business. Many of you here know this story and know Domino’s well and so one of the things that we’ve tried to do is each year to give you a little bit deeper dive on one of the areas of the business. This year it’s really Kevin, is going to be taking you into the digital side and the IT side of Domino’s, a little bit more on what we are doing there and then Rich giving the update on the international side of the business.
And I want to just start out today by giving you a kind of my overall perspective and where I think we are as a brand and kind of how I see, where we are within the overall industry and kind of the 30,000 foot view of Domino’s and our opportunity. I think the headline here kind of says it all. I think as we have changed this brand over the course of last few years and most importantly changed the perception of the brand in the minds of consumers, we are in a position where we really I think are providing leadership to the pizza category to have a real opportunity to continue to lead within the category.
This all started you know well with as in the quality of our food and we are now very proud of everything we sell. I think really the core parts of the menu getting this handmade pan pizza out was one of the last really big gaps that we had on our menu and having an offering there that we were proud of. And we importantly not only are we proud of all the products that we're selling today, but consumers give us credit for that; I mean we get the ratings back from consumers now around taste and quality perception of Domino’s and we do really incredibly -- and we just do incredibly well with consumers and their perceptions of the brand and brand quality.
We continue to have I think incredibly efficient operation which is important for box economics; it's also important particularly as you talk about international where the footprint of our stores relatively fall; real estate is on average, more difficult outside of the US than it is inside the US and the efficiency of our boxes is important and we think it is an important part of that. And those efficient operations are what lead to what has always been the core of our brand equity which is nobody is better at making a hot pizza and getting it to you quickly than Domino’s. And not only as we have rolled out the new pizza’s and talked more about the quality, not only have we not hurt the perceptions around Domino’s ability to deliver quickly to consumers, we actually get more credit for today with consumers than we did two or three years ago. So you know that brand equity around service and around quick delivery and the reliability of the delivery has only gotten better with our customer base over the course of the past few years. All which leads to now just very, very strong brand equity, both within the US and around the world.
So really three headlines, I think for today that I am going to speak to a little bit and then the team is going go into far more depth on this. But the first is a view of the US and the bottomline is US is a share gain. There is a little bit of growth again in the category which is terrific; we didn’t have growth for most of the decade of the Otts from 2000 until late in that decade, this was not a category in US; that was growing; it is now but very modestly. It’s a point or two of growth in the category and at least while the economy is where it is today and the consumer attitudes are still what they are today, I don’t know that I see anything that’s going to dramatically change that. So as we look at the real opportunity for growth for us in US, we think its share gain and I’m going to talk a little about what I think is real advantages here and why I think we can take share in the US.
Second, and clearly Kevin is going to be diving into this a lot more, but technology, we have talked about, we are going to talk about in depth today. It is a very big part of the story for us. We think is a real key to winning and frankly we think plays back very strongly to the share gain in the US. And then finally, international, which does have a lot of growth in the category, but I am referring to it here as a scale gain and I will take into thinking around that little bit more here. But big business, big opportunity, still lots of growth going on and its really a question of do you have the scale, do you have the brand awareness to make that work around the world and how many players actually have that, and we think we are pretty unique in how we’re positioned on this.
So first I am diving back into the US and kind of the share gain. It’s interesting, if you kind of step back a little bit first, this is the single more fragmented industry category within the restaurant industry. So first, taking you through some of the other categories, so this is NPD CREST data and this is the QSR hamburger business in US. So 96% of the hamburger business retail sales in the US are major chains which I think they define as chains of 250 or more stores. So what you see is small chains, independents are a very, very small part of the overall picture in the hamburger industry; that's the most consolidated of the restaurant. So now you start working through others, so you work into QSR Mexican and you’re looking at 82% with major chains and then again kind of an even split between the small chains and the independents doing a little bit better than they did in the hamburger business, but still overwhelmingly about the major chain.
You go into sandwiches. Same story again, again little less for the major chains, a little more for the small chains and the independents, but still overwhelmingly about the major national chains. And then finally you get the pizza and specifically I am calling out pizza delivery here, it looks the same for total, a little bit less, but you are talking about basically 55% of pizza delivery today is in the major chains; if you go to total pizza, that number is more like 40%. So even where we are strongest as a brand and even where the major chains are strong as a brand, this is a category that has not consolidated; it really is not.
So what you see is independents about twice the size in delivery than the small chains; when you get into total pizza, that's a little bit more balanced between the small chains and the independent chains. But what you’ve got is a category that hasn't consolidated very large 35 billion in total pizza, about 30% of that or so in the delivery side of the business; but the real opportunity to take share overtime. And if you look at what’s happened now over the course of the last five years, you see that there has been now some consolidation and this was not happening before; this is an absolutely new phenomenon in the pizza business.
So if you go back 15 years and go from kind of the mid 90s or even the early 90s until kind of you know this starting point in the late 2000s, the answer was the big chains had not taken share from the small chains and from the independents. And now if you look at it over the course of the past five years, we've taken share, so our largest competitors and importantly if you look where its coming from, you know 16.4% with the regional chains in 2007 to ‘14 for, in 2012 and if you run through the math on that they've had a very significant decrease in sales. Now the category has grown a little bit during that time, so would have offset a little bit of that drop, but two points off of a base of 16.4% is a pretty big number.
And so you are starting to see really for the first time in the category this consolidation; clearly, we've done very well you know the starting point in 2007 was a pretty lousy year for Domino’s Pizza in the US, so that may mean that that difference is a little bit bigger than it would have been otherwise because it was a little bit lower base in 2007. But fundamentally, this is something that we haven't seen before in this category. We have not seen consistent share being taken away from the smaller players particularly from the regional chains going to the majors. And as you know well, particularly now the past 18 months or so while we are getting nice growth in our business so are our major competitors, so you know, so are Pizza Hut and so are Papa John’s and it's not because the category is growing at kind of the average rate of the three of us, it's growing a little bit, but the three of us are taking share from these regional chains.
And so the clear question is why and there are lots of reasons, but we think this is an incredibly important one. So again NPD data, this shows what the share is today of online dollars from customers in the US and what you see is number one, we're doing incredibly well. About a third of our business is digital today, but interestingly, it's just a coincidence about a third of all digital dollars being spent in pizza go to Domino’s today. If you add up us and the other majors, which are Papa John’s and Pizza Hut, you are looking at 85% of the online pizza sales today in the US are going to those three chains. The three of us absolutely dominate here. This is a very tough place for those regional chains and the mom-and-pops to play and Kevin is going to be taking you through this; really this is why we think this digital story is so important. We think this is the big lever that has caused share to start shifting from the regional, because they just can’t play well, and effectively and efficiently in this space. The majors are dominating here and this is kind of the way the numbers play out today. So overwhelmingly digital is about the three of us.
So that takes us into the next section of this which is around the technology and why we think that is still key. So interestingly, if you go out and this is again NPD data here and you talk to customers who are going to restaurants and say what is the role of technology in you making your decision about where are you going to eat tonight. And the answer is, 43% of orders customers are saying that they are actually going on to their smartphones to look for something related to the restaurant where they are going to eat tonight. And 38% of them say that actually wind up influencing where they made their decision to give their business tonight.
And when you ask them, where are you going, so what websites are you looking at to get that information? The leading place that they are going today is us. They are going to our own website; so whether that’s about finding out what the menu offerings are, looking at what the prices are, finding the location of the restaurant, they are coming to our site and our competitors, large competitors sites to get information around where they are going and you can see after that then they are going out and as you add up all the numbers they are clearly often going to multiple sites, may be getting reviews, finding out where their friends have been going, whatever it may be, but 38% are checking their smartphone to get some information and the largest source of that information is our own sites.
So we think we have done a great job here. We think we have done a better job than anyone, but the point, I think you really hear me say is this is really about the major players and the benefit that we have, the advantage that we have against the smaller players in the category. But we’ve really led here with our apps and Kevin is going to take you through all this more to Pizza Hero, making your own, the Pizza Tracker which has become a beloved part of the Domino’s brand and been out with Spanish language apps; its an area where we have invested heavily and are going to continue to invest. We think there is real competitive advantage here that is hopefully going to keep this share gain going into the future.
The other thing, it allows us to do a great way to kind of add on to our national windows, to kind of the extend the experience for consumers; again the Pizza Hero having the people design cars, delivering vehicles for us, the Times Square, Billboard, we are putting all of the live unedited reviews up on the Billboard in Times Square kind of as a evidence of the transparency and accountability of the brands. And its also been a way for us to start to leverage this into kind of some unique promotion, Domino’s, The Global Domino’s Day, is something we’ve done one day each over the last two years, where we got this year the majority of the stores around the world to all participate in one promotion on the same day. It’s interesting. If you look at our Facebook page today, we've got 7.5 million fans today. The interesting thing about that is a very large number of those are non-US based.
So, our Facebook page that for a long time we are kind of looking at and thinking well the other markets have their own Facebook pages so this is a kind of our US Facebook page the answer is no, its not. It’s a global communication platform and so we’ve start looking at other ways that we can start to leverage that and thinking about digital a little bit more globally than our mass media which is very much country-by-country.
Domino’s dollars another way of kind of leveraging this platform that we have with the most recent promotion we did for 10 or 12 days where we had the $5 bounce back when people ordering online, a way to give them value, a way to get people to continue to shift towards ordering with us from a digital standpoint. And we’ve got this integration with a single platform and again Kevin is going to be talking about this that allow us to doing things like Tracker that are really unique in the industry.
Finally, I want to talk about the international side of the business and here I'm calling it a scale game and this is really about size and scope of the international business and those players who are really I think in a position to drive real success here long-term. So first of all, 95% of the population of the world is outside of the US and we are as you noted a roughly half of our sales, a little bit over half of our sales now are in international.
So, there is still obviously huge opportunity. Most of the people are here in the US. We've got this very big footprint with terrific success in over 70 countries today. We are today truly a global brand, but this is a scale game and as we look at it there are six public companies that have real scale in international today and one private in Subway but fundamentally these are the brands, these are the companies that have figured this out, that have significant scale that have the resources, have the people, have the footprint, are driving real profits out of their international businesses and basically after these six, it falls off pretty dramatically.
You know, so these are the scale players, these are the folks that I think have a real long-term opportunity with their international businesses. And interestingly, as you look at those six, these are all US based companies, so [quiz], audience participation, the world’s largest restaurant company not based in the US.
Tim Horton’s is top five, bigger than Tim. Jubilant, no. Jubilee, oh Jubilee, okay, yeah no. They are close, yeah they are close. The largest non-US based restaurant company. You've made my point beautifully. Enterprise Inns, they run a few thousand pubs in the UK. They actually don’t run them, it’s an interesting model. They actually own the pubs and then they bring in operators to run them for them but that’s it and if you think about the other largest players.
You know, so Timmy’s, dominant Canadian business, trying to work their way in the US but very limited footprint overall. There is something called [Paris Cafe] based out of Korea or Japan which is clearly where you would headquarter something called the Paris Cafe.
You know, but the real point Telepizza out of Spain. You know, you are looking at businesses outside of the US that are today just not scale in terms of their international footprint. So for whatever reasons, today the global players in the restaurant business are those six companies that I showed you.
There are no big players outside of the US that are expanding out there while you are watching. If you are wondering, when does the big local competition grow up and when do you have big problems in Asia from a new pizza player growing out there. The answer is they are not there. There are single market or two market operators out there but this is a US company based gain today where you got players that are operating in 60, 70, 80, or 100 markets around the world and I think there are parallels prior to my Domino’s days.
I was in packaged goods. We got a number of folks on our team who has some packaged goods background and I think there are some parallels to what’s happened in the packaged goods industry over time. If you go back to the early 50s and prior to that you had a lot of regional brands in the US, and over time the scale of advantages of brands that became national, that had national advertising, that had supply chains, that were at scale that had, importantly and different to the restaurant industry, had the relationships with the national retailers and grocers.
Those advantages over time really drove most of the regional brands out and you wound up by the late 60s into the 70s may be early 80s with most of the brands becoming national players, most of the regional brands kind of falling away. And then the next step started, which was what those same things happen over time around the world, scale around the world, purchasing power around the world, brand knowledge, the ability to hire talent goes to the largest companies and I was at a company prior Domino’s I was at [Gerber] Baby Food. It was a very, very strong national player. I worked on the international side trying to figure out how to break into Europe against Nestle, good luck.
It was tough. I have a few bruises still from time trying to do that and everybody was figuring out what you have got to be global. At some point you have got to be global at some point you got to have that footprints around the world that scale is going to matter. This all happens in packaged goods now 20-30 years ago and here is the net affect. Way back when almost all of those brands on that page were independent companies.
Now, the restaurant industry isn't going to consolidate through acquisition which is what happens with most of us big difference. But, fact is scale and the advantage of the scale drove back consolidation, it happened in the different way, but at the end of the day this picture looks very different then I was in the packaged goods business you know 20 or 30 years ago.
This is now a scale business dominated by 10 or so very large global packaged goods companies, and I would tell you, I think the same thing is going to happen in the restaurant industry. It’s going to happen differently but people who have the global scale overtime are going to be the people who are going to win.
People who only have the domestic footprint at some point, there is a limit that how far they can go and we think we are incredibly well positioned given the relative size, the growth that we are experiencing, the profits that we are driving out of our international business, and we think there are basically only a handful of companies today. We look at and say yep, they have got it, and they are going to be able to continue to drive that.
So, you look at how this is all playing out. I already showed the slide that say regional players in the US. You are starting to see them in the pizza category getting squeezed and you saw in the other categories, it’s already happened to a much greater degree than it’s happened in the pizza category.
This has already happened in those other categories and we think the global players are going to dominate. We think over time when you look at those six companies maybe throw in Subway as the seventh as a private company, we think long-term that's where you are going to see the growth. 95% of the world is outside of the US. There aren't big scale restaurant companies based outside of the US which we think gives the six or seven of us a great opportunity to really grow over time.
So, that's kind of the 30,000 foot view that's where I think kind of we are, where our real competitive advantages, why I'm optimistic about the opportunities for Domino’s going forward and all of that has played into awfully nice returns. There has been a lot of discussion around kind of what's happened here over the course of the last few years.
But I think what's really more compelling is not what's happened just over the course of the last three years or so, I think its more and taken it all the way back to when we went public in 2014. This chart assumes reinvestment of our dividends, all the dividends we paid back into DPV which I think over time has proven that would have been the best place for those dividends to go and you are now looking at about eight years going into the ninth year since we went public and our total compound return over that time is pushing 24%.
We are pretty proud of that track record and I think kind of what I have laid out for you is kind of why we think we've been able to drive those results and why we are very optimistic about the future.
And with that, I would like to introduce Kevin Vasconi. Kevin joined us just about a year ago now as our Chief Information Officer. We are thrilled to have him on the team. He is off to an absolutely fabulous start and as you know and as I just said, we think this is a critical part of Domino’s advantage and the Domino’s brand going forward. Thank you. Thanks Kevin.
So I’ve got Technology [Day] which is absolutely my passion. Pizza and technology are both passions of mine. I picked three topics for us to talk about today. They are all very related and they all have to do with the digital experience, the digital phenomena quite honestly what's going on.
So when I talk about our investment in digital growth, we are also going to talk about our evolving 360 degree view of the customer and the date and the data structures that are behind that, okay. And we are also going to have a little section on what is the Domino’s customer which is actually fascinating for me hopefully you guys I think it’s fascinating too.
And then to support both of those a continued investment in our infrastructure including our global point of sales system which we are going to start building the next generation of and I'll talk to you guys about that in just a minute as well.
So let's dive into digital. This is a really sexy part of my presentation. So why invest in digital. Tickets higher and tickets higher and that's not just a US thing, that's a global thing. We know that better customer satisfaction I've got a slide on this. This one is fascinating to me because it’s across all demographics, right, all age groups. You wouldn’t think it would track the way it does. Lower cost to serve, computers don't get sick. They don't get hangovers. Very occasionally get sick. My boss would know.
Unfortunately, occasionally they do get sick for the most part they don’t get sick. They definitely don’t get hangovers. Computer programmers get hangover but computers don't. But the point here is it scales very, very well and if you are in store on a Friday night or Saturday and it's getting slammed and all your phone lines are lit up, you want to add somebody to answer the phone or do you want to add somebody on the (inaudible) client or do you want to add another driver. That’s how we get throughput in the stores.
And this scales, I mean it scales across 5,000 stores domestically. It scales for Super Bowl. We can process a lot of orders and it's a very, very cost effective way to do it. The other beauty of it is our customers love it, right? They love the digital experience. I am going to get you some data on that.
And last but not least. As Patrick talked about, this is a competitive advantage, especially when you look at [regionals] on the mom and pop. You know, if the mom and pop and regionals cannot afford to do this, which is one question. They are usually using a third-party or an aggregator and why would you let somebody get between you and your customer. They have a disintermediation step in there. We don’t have that. We control the customer experience. We own the data and we scale out across the network.
The other thing that, this investment in digital has enabled us to do is making investments in things like Tracker and here is one of the great things about Tracker. By Tracker our customers love Tracker, I love Tracker. Hopefully you guys use and love it but what other e-commerce company continues to keep your eyeballs on product for 30 minutes after you close the transaction. If you are on Amazon, if you are on Best Buy, if you are on Wal-Mart, you complete the transaction, you are gone.
The Domino’s, we continue to maintain that relationship with you via Tracker and I think that’s one of the reasons why it's so popular. So let’s take a look at. Yeah, the other thing I think is really important along that same line is extending the digital experiences. You know, Domino’s, as Patrick alluded to are actually stated is a brand built on convenience and what digital allows us to do is have this ubiquitous customer interface and customer experience and the idea is any channel, anywhere, anytime I can have an experience with my customer and that’s why we are building out these digital properties to do.
We are very, very strong in mobile, we are very, very strong in in-store, a lot of people order from their car, I order from your car you are not suppose to but there is more work to be done there. And then the one that really intrigues me, the one that really fascinates is the living room experience, right? I mean where do you want to get to people, you want to get to them in the living room, that CES last week and at least three of the big manufacturers, TV manufacturers were showing production televisions that not only had gesture capabilities but audio capabilities, sound capabilities, voice capabilities as well.
So as a guy who is absolutely obsessed with ordering platform, so I look at that and I think wow that will be a really cool ordering platform, right? And the fact of the matter is that technology is coming into the house right now, right? So, one of the reasons why I am so obsessed with ordering platforms is this is one of my favorite chart which call it (inaudible) chart because of the lovely colors but it also has a nice slope up into the right.
Digital orders are up 27% over 2011. Our customers loved the digital experience. They are moving to the digital experience. But the interesting thing on this chart is if you dive into it and you start to look at the channel segmentation right red is online. This is really PC office kind of use, good business no complaints there. This pinkish color is mobile. So that’s tablets for the most part or anybody who uses browser, mobile browser on even the smartphone say, I have elected not to download the application.
This is iPhone looks that’s amazing and this is Android and the thing I will draw your attention to is every time we introduce a channel, a new channel we don’t see a cannibalization or if we do see a cannibalization, we see it for just a little while. New channels equal new customers, additional customers and more growth, and this is great evidence for that. In fact a little bit more, this is also fascinating here look at the iPhone users as opposed to the Android users. I got a slide on that, we are going to talk about that in a minute as well.
So how are we doing? Very strong the-commerce company, digital business over $2 billion as Patrick said in digital sales worldwide which has got 23 markets global markets outside the United States a few more than 10% digital sales, and the next one just totally blows me away, we have three markets in the world that do over 50% of the orders online today.
And of course, as you’ll see in a couple of slides and I think everybody knows mobile is absolutely the fastest growing segment here and Domino’s fully supports that, we got a lot of great stuff in that area. We dive into the US market we are $1 billion e-commerce company domestically, 50 million orders that's a lot of orders small transactions but a lot of orders, again mobile is fastest growing segment for us as you saw on the previous chart.
This is a great statistic. There is the internet retailers on top 50 list we are not on it, but if we were just on our data, 50 million orders would put us number three in transactions on that. And I am getting a look at my notes here just to tell you who is number one and number two. Amazon as you would expect number one at 218 million and Apple number two at 78 million.
So 50 million is very, very respectable number, if you look at total visual sales, again because our transactions are smaller, we rank about 31. Right. So this is clearly a great success story for us and a big part of our business. This is the slide that when I first saw the data it really I challenged it a little bit. I would not have thought the demographics would have worked out this way. This is customer satisfaction across all ordering channels. Blue is online, red is phone and green is walk-in and you would think you know down here in the 18 to 24, the 25 to 34 you would get those kind of demographics, but look over here in these demographics, the 55 to 64 and the 65 plus kind of Mike Lawton’s demographic in there. Look at the amazing things that are happening just you know like Mike, he is really not in this demographic, but look at this. Look at this, this is amazing. So across all demographics our customers absolutely have a better experience on a digital platform. That blows me away. You got 65 year old plus people that love the digital experience and Mike Lawton does too.
So as I said mobile is huge for us, fastest growing segment, our competition would say the same thing, Amazon would tell you the same thing. I think any of the big ecommerce companies would say the same thing and we've been in this space for a while. We are a leader in this space came out with the iPhone, Android, released the Kindle last year, I'll talk a little bit about why we did that. But if you look at iPhone, 3.6 million users on the iPhone, tremendously popular platform for us; iPhone users love us. We are going to talk a little bit about that. Right now but three in a certain drink category but have an update on that because my son looked this data up before I left home, we are actually number two. Those numbers move up and down, Starbucks is number one. We are number two. For those of you who keep score not that we do, the Hutch is number six and PJs is number nine so we've probably blown those guys away.
And the reason we blow them away is, no seriously, it’s a great application. I use it all the time. I'm extremely loyal to the iPhone application. Android released it later. I think you are going to see at least as much success on the Android platform. We are later to market on Android, great take rate, three quarters of a million people have downloaded that. Its ranked number four in the category, but we are ahead of all of our competition there. And then we released this Kindle. Kindle Fire actually is a pretty popular platform. It’s a low cost platform, very popular, it’s very popular around Christmas time. So the question is why we release the Kindle? Well 49,000 users isn't bad; 50,000 I'll take that. The operating system is nearly identical to the Android operating system. It’s a very cheap platform for us to launch. We got to do some experimentation. We've got another one. We are ranked very well there and again look at this customer experience rating; five stars, 4.8, 4.7. We do very well in this space and we will continue to do very well, continue to invest in this space.
This is one of the things that, there's a lot of interesting data here. The age demographics thing I found fascinating. As we dive into mobile I also find this very, very fascinating. If you look at worldwide market share for smartphones, Android is definitely the dominant phone, no surprise there. iPhone holds it to only at 20%, US is little skewed a little bit different, UK is skewed a little different and Australia is skewed a little different, but even there you know half of the phones sold in this country are Android phones.
And then look at how our users break out between iPhones and Androids; Australia whopping five to one; Japan three to one, US three to one, UK five to one and India two to one. The only one that's close to the market, right. So this is interesting because it doesn't reflect market. And South Korea, and South Korea is a huge Android market, I mean most of the Android phones are actually made in Korea or Japan. So that's very interesting and why do we care about this, the demographics for an iPhone user are outstanding. They spend more digitally. They are more affluent, they are more educated. So I love our iPhone users and we will continue to embrace our iPhone users and these other countries Australia, Japan and UK will also do the same. In fact Australia just launched a great piece of builder application on iPad; it’s outstanding if you want to take a look at that.
So the one thing about my job that I love is it always changes and in the digital space, especially the mobile space, the trends, they change every day. One of the reasons I go to CES is I need to stay on top of I know where the consumer trends are going. So we know they are going to continue to evolve and therefore our platform strategy needs to continue to evolve, but the downside about a platform strategy that hits every platform is it can be very, very expensive, right? So every time if somebody introduces a device I don’t want to necessarily have to build an app for it, because not only do I have to build it, but I have to maintain it, right, and the maintenance fees will kill you.
So one of the things we're doing is looking at and we've actually build this and we will be launching it about mid-summer. We're doing the branding on it right now. It's just the concept of response of web design. And the idea behind responsive web design, underlying technologies, behind that are HTML 5 and cascading style sheets and the beauty about it is that it will actually size itself to the device which we're going to be on. It automatically detects the size of the screen that you are going to be on and it will size it.
And if you want to actually see a demonstration of this, you can go out to Starbucks. Starbucks is one of the few companies that already have it out there, bringing up like the Chrome browser because it's a very good experience there. Just grab the corner and start sliding and making the screen smaller and smaller and what you will see is it will actually adapt itself to that. And then think about that as it's an application that’s going down to your smartphone and it will automatically size it. We built this and the reasons we do this is it's a very low cost way to hit a lot of platforms. Again, we want this ubiquitous user interface. We want to be where our customers want us to be because this is the world I live in. Just in the last quarter of last year, the fourth quarter of last year, Samsung introduced the Galaxy IIIS. Our friends at Apple introduced the iPad Mini, Microsoft came out with their tablet and this kind of device propagation continues in our industry all the time, right? And they want to be everywhere; they want to be on every ordering channel; I need to be there with a very good, very rich experience, always pop a browser on these things, I mean try popping a browser on your phone it’s not a very rich experience.
So what the responsive web design allows us to do is as these new platforms come out, get after them very, very quickly with a very rich customer experience. And then if we see one of these devices taking off like the iPhone or the iPad, we can build an app that’s customized to that experience, best way to manage our resources, best way to manage our investment and quite actually a lot of fun. This device is going to do really well in the marketplace. There are some other things we saw at CES which I don’t think is going to do well, but I am not absolutely the best at predicting the trends. There are these things called, it’s a class between a small tablet and a large phone and they were everywhere at CES and it’s to me it’s much too bulky of an interface but they are making a lot of them right now, so it’s a little bit smaller than an iPad, a little bit bigger than a Galaxy but if you guys have held one of these Galaxy’s it’s a handful reminds of the old days with the shoe phone kind of thing.
Anyway, so let’s talk about how we continue to evolve our customer database. All ecommerce companies basically have three leverage you can pull to drive digital sales. If you hold conversion steady and take it steady, if you drive more traffic by the nature of the app, you drive more sales. If you can increase your conversion rates, hold your traffic steady you drive more sales, if you hold traffic and conversion constant and you can increase ticket, you drive more sales. These are the three levers we have to work with. So what we are doing is we are actually attacking all three of these, but we are using data and statistics to help us do that; we didn’t pioneer this, but we are very fast learners. And primarily we do that is via AB testing, so think about Amazon, think about Google, truly the pioneers in this area, nobody does it better than Amazon does and we have learned a lot from Amazon, but the idea behind the AB test is if you know what digital is, I can randomly direct customers that come to my site to experience A or to experience B, right, that's what Amazon does literally every time you log on, that's what we do and actually we run one of these experiments at least one every week and we run them constantly.
And then what we do is we measure the customer response to that experience, if it’s a good response to that experience we make the change, a response to that experience, we chuck up to our experience and we move on, and the things we look at is the defection of bounce rate and then we are very interesting in conversion rate, I would spend a lot of money to drive people to our site, what we want, when they are, we want to convert them into customers, paying customers.
The other thing we look at is order funnel behavior and I’ve got a slide on this and this one actually, this is kind of interesting. So this is what happens when the GC gets the hold of your slide before you present it, basically it’s the need of all data and its not just scale all right, so you can interpolate, but that's not the reason I wanted to show it to you, what I wanted to show you, its actually a value to me, I hope you guys like it. But what it shows is the order funnel and what it show is how we apply statistics and measurements to the order funnel. Our business is a little unique, everybody tracks total visitors, everybody should track total visitors; for our business we need to know the location and we need to know, we need to be able to select that because we need to know whether its order or delivery, so that is probably a little unique in our order funnel but the rest of this is the same, whether you’re buying a pair shoe, or whether you are buying a TV or stereo, you select your food, you add it to the cart, you submit payment and then again uniquely for us we track the after sales experience as well, all right. And this is that I talked about a huge competitive advantage.
So what you do and maybe experiment is, you track the delta, so you got a control group and you got the response to it, so what we are trying to illustrate here is because we’ve instrumented this process and we have the statistical analysis that goes along with it and the people to look at the statistical analysis, we can make a change to the order flow process and we can measure to see whether that change actually impacts either our conversion rate or ultimately what we want is payment. The other thing you can do is you can start to look at some opportunities. So clearly here even though this is not the scale there's an opportunity why are we losing people between total visits and when they select location, right. So again an example of how we apply both statistics and real time web analytics to help us drive the business to help us make a better consumer experience.
The other place we use statistics and data analysis, real time data analysis, actually involving the user interface itself, right. User interface is an art as much as of it is a science but what we try to do is apply the same statistics and analytics to how do we even lay out the user interface. So everybody in those focus groups, the new focus groups for 25 years and they are great for insight. But when you add analytics to focus groups you can actually start to do some really cool stuff. So not only do we track, you know where do they click, right, how do they navigate through our site, because we want that to be the most efficient and effective. But today and this technology has been around for a while, we actually track their eye movements right, because what you want to have is not only do you want to be able to navigate through the site but you want to be able to navigate through the site quickly, efficiently and it has to be a good experience.
So if the bounce and all over so just again just kind of comparing contrast, the idea here is look at the macro; many less eye movements here than here. This person was bouncing all over the page to try to do the same task, right. So we can actually, we do this, we will set up a used case or a test scenario and we will track to see okay not only did they accomplish that used case and then we will interview them afterwards and say was that a good experience or bad experience, but we can actually watch what they actually do, what their eyes actually do and if they are bouncing all over the screen it means you've got a bad user interface which means it’s a bad experience. So we use this a lot; it’s a very powerful tool, but again its analytics combined with the traditional focus group, so it’s very, very powerful.
As we continue to evolve our view of the customer, we need better and more timely access to the data so we continually load more and more data into our data warehouse. We continually make it available through our BI tools and the same as our customers love mobile, our internal people love mobile. Patrick loves mobile, Rich loves mobile, I love mobile. We want to make sure that we enable those same tools that our customers get or the same vision or version or vision of it to ourselves.
Anyway the other thing and this is I'm going to get a little esoteric here unless I've already been esoteric for you guys, but it gets worse. The idea behind the data here is that we really want to understand who our customer is and then how they want to do business. Again, if you want to have this ubiquitous relationship with the customer you need to understand who they are and how they want to do business and what they want to do with you; which you would think would be a very, very easy thing to do right. Your customer is Rich Allison. Well, I can tell it’s a little bit more complex than that. So use myself as an example to talk about customer complexity.
For Domino’s and it’s not the same for all online businesses, but because we have so many channels that come in from an ordering platform we have to aggregate that view of the customer profit. So just for example, I go by Kevin Vasconi. My legal name is actually John Vasconi. So here is all the difference legal names in my household including my wife and sometimes its Lisa Vasconi, sometimes its L. Vasconi. My dad is also named John Vasconi, but I guarantee you he has absolutely different pizza buying behavior than I do. I have four kids, he is retired, okay, who do you think buys more pizza. So and then actually we had one, my friend actually who went through this presentation with me, he wanted to make sure that we added one more John Vasconi, so my eldest son is actually named John.
So if you are just trying to market John Vasconi, which one of those Johns do you want to market to. right? If you are going to do precision marketing, who do you want to market to? Good question. It gets worse; multiple addresses, multiple e-mail addresses. Now granted and I may have a little bit more e-mail addresses than most people, but I would contain that most people have at least two e-mail address; you got a work address, e-mail address and a personal address. So if are fine to have a relationship with Domino’s and you do it from work and then you do it from your home account, wouldn't it be nice if we aggregated that data together so we could have a very rich experience with you.
Landlines, people still use them. I’ve got at least two, one at the house, one at the office; cell phones, this one, what a proliferation. At least five cell phone numbers in my household. So if somebody is calling into Domino’s on their cell phone, can you just use that number to identify who they are, well you can give them, but you know what membership they are and it goes back to this John Vasconi, John K. Vasconi. So what are we trying to do, a rich satisfying relationship with our customers, really no matter what channel they want to do business with us. It's very unique to our business.
So this gets a little bit more complicated because now I want to talk about, so that’s one individual. That’s me. How complex it would be to deal with me. Now let’s talk about what is a Domino’s customer and I always tell this story and I am sure some are tied in here, but the people ordering experience at my house goes like this. So if Russell wants to market to me, that’s fine, but this is how it works in my house. My wife and I decide we're going to have pizza. I literally yell around the house, there are four kids and I ask each one of them what they want for dinner. I aggregate that order back together. I order something for myself and I present it to my wife who is the arbiter of health in my house and she de-selects the double-meat pizza that I just ordered because she thinks I am getting fat.
So in that decision process, you know, the only decision I get to make, I get to make the decision on what method of payment am I going to use. So think about this as precision marketing, no seriously, why don’t you market to me, why don’t you market to me, I don’t have, I have no decision making authority in my house who do you want market to is, you want to market to my wife who is health conscious, you want to market to my kids who order more pizza, I don’t even know how to get all that pizza. So that’s this concept of what is the customer, here is all the channels, phone, cell, email, social media, name, carry out what do we need to know about them, preferences, demographics, payment type, order history and then this is where it gets really complicated, but this is where it gets really fun and challenging as customers are part of groups, a customer is part of a family, a customer is part of the work group, how often at work do you pull your pizza order; that’s a customer to us. We need to understand that, a social group, ad hoc group, this could like at a soccer game or something like that, that’s the challenge in front of us, that’s the challenge we are attacking I hope that wasn’t too esoteric for your guys.
So now let’s talk about improving the infrastructure and the one I really want to focus on at least initially is Pulse. Patrick mentioned Pulse; Pulse is our point of sales system developed in house and it really is a competitive advantage for us it’s a single common global point-of-sales system; I challenge you find one of our competitors that has that. So the interesting thing about Pulse is it was developed in 2001, the first iteration of it and so when we are sitting on in a conference room, we’re like okay what was it like in 2001, it’s kind of a trip down memory lane; I think most of you guys remember Nokia the cell phone, they were number one at the time; I remember actually having a Nokia phone. They were number one, Windows had just released XP a great operating system; this little company in California had come out with this music player that none of us knew we need it and we all immediately ran out and bought several of them and a very, very young Dave Brandon just opened their 7000th store; that was 2001 that’s when we first released our point of sales system, and as you guys know 2012 why has the world change, I mean look at the influence of social media on it, the same way a music player company has one of the best and dominant cell phones and the market really has changed the industry, hands down.
As Patrick mentioned, we got things like Pizza Hero, we have very, very large digital presence and actually very large carry out to. But the world’s changed and this is our menu from 2002, the other way, I think to illustrate how the business has changed, look at the menu from 2002, this is our menu 2002, statistics aren’t as important as, this is our menu today, look at the complexity in the business today. Look at the complexity the point of sales system has to support, look at the complexity that our online systems have to support, all right, and this is great, this is wonderful, this is what our customers want, but again from an IT standpoint, we’ve got to build systems to support that much choice, that much configurability and make sure we do it quickly and accurately for our costumer.
So the next generation of Pulse is being built really to meet the future, what’s going to happen online, what’s going to happen with the carry out business, what kind of requirements is Rich going to drive from an international standpoint and this is a major milestone for us. This year we released our Unicode based, Unicode is about also called [Do Buy]. The reason Do Buy is important is now you can support the Asiatic languages, you can support, relinquishes Russian, you can support a lot of the Asian dialects, Kanji, mandarin and Chinese and things of that nature. So some of the markets where we couldn't get to before with Pulse, because of the language requirement, we took that off the table and we actually rolled out this last year.
The other change we made is, Pulse is now managed like a software product; it is a software product. And what it needs to do is it needs to be managed like that. So we published a three year cycle plan. I communicate that cycle plan to our franchises both domestic and internationally. We managed to it. I work with Michael Lawton in the finance team to make sure that we are making the right investments at the right time across three-year rolling horizon.
We do product releases. We do product notes. This is a commercial piece of software which just happens to be built by Domino’s, right and we are going to treat it as such moving forward. The next generation of Pulse will also be built on the current state architecture without getting into too much detail. If anybody wants to on break we can go pretty deep on this. It’s going to be bit of service oriented architecture.
The difference between applications that were built around 2000 and how we build applications today is they tend to be a monolithic block of code, just think of really, really, really long blocks of code, right, lots and lots and lots and lots of instructions in one block and what you do with the service oriented architecture is you break out the services.
So there will be a location service, there will be an identification or authorization service. There will be a pricing service and you write up once and you call it multiple times, right. You don't keep embedding it in your code or do these crazy loops but the other beauty about this is it positions us to do whatever we need to do in the cloud moving forward.
A service by definition can run in the cloud, can run in the store, can run at WRC, it doesn't make any difference. Now, are we going to move to moving our point of sales system into the cloud in the next couple of years? No. The rest of the infrastructure has to catch up with it and that's not our infrastructure. That's the infrastructure of the internet to be highly reliable, but the beauty of this is when we want to move to it we will be positioned to do that and some companies are doing this. And none of our competitors doing it but you will see some companies doing that.
And then last but not least, as Rich continues to challenge our organization as he should to support his international growth. Every time we are above the new market, we've got new regulations, we've got new business processes, often we have a new language and that keeps us very, very busy but we are absolutely committed to driving the international growth in partnership with Rich.
So what does that look like? The other thing we are doing is change up our offering internationally. In the past we've offered a Pulse and I've got a slide next to show you to the take rate that's been very, very good. Although, it’s our online platform, POWER is our reporting platform.
The reporting platform built for the franchises. They absolutely love it domestically and then API stands for Application Programming Interface. This is the ability to punch out and integrate with back office ERP systems and things of that nature. This is now going to be the offering we are going to take to the international market. We will go to mid markets first with Rich working on that.
The big guys have the stuff already they have invested in it. The mid markets and emerging markets I think will benefit greatly from this. And that's in that slide. So this is where we are at Pulse wise. Every US store has it internationally. Rich keeps building stores really fast. So this may slightly be a little out of date. About 2,600 stores deploy internationally on our single point of sale system, 38 countries.
Seven countries are scheduled. These countries are scheduled. They are sold. They are ready to go. It’s just now a deployment as we roll through. So very, very successful platform for us. And as Patrick said Pulse enables us to do online. Pulse enables us to have this relationship with our customer because it’s the cornerstone; it’s the point of sales system.
As we continue to drive more and more of our sales online and mobile, it becomes more and more important that those systems can never go down. A down system means you are losing order. The only beauty about the phone is it never goes down. You can lose power and your landline phone will work. Your IP phone won't work but your landline phone will work. So what we have to do is we have to continue to invest in making sure that our online properties and channels are always available. And some of that’s within our control and some of that is not exactly we're going to control. So I can control systems up time and user experience because not only does it have to be available but it has to be a good experience.
If you’ve gone to some of our competitors’ sites when they are really, really busy, they tend to be slow, they lag. People will bail on that, they don’t have to put up with that kind of experience, right. There is too much competition.
The other side is we have to process credit cards. A majority of our transactions online are credit or debit cards. So we have to punch out to a third-party credit card processor and unfortunately, it's part of being in an e-commerce business, the security threats, hacking, DDoS attacks things of that nature. So, one little deeper dive on this. What do you do about that?
Well, first you implement this concept of N + 1 design and really what it means is you limiting all single points of failure. There is two of every thing. Okay, in systems design. And in early days when we use to build this kind of stuff, we just put two pieces of hardware in. It's much more sophisticated than that now. We actually make sure that the software is replicated as well. Right? So you eliminate the single points of failure. You double up on your hardware.
The other thing that’s really important is capacity planning. We do semi-annual capacity planning and the cool part here is we run it up to Super Bowl levels. All right. So, twice the year I test my system to Super Bowl levels which is our highest volume day of the year and just to make sure that we can handle the load and then we continue to invest in internet connections back to WRC.
We also continue to invest in security. We’ve augmented our team this year with some external security expertise and services that we buy. So a lot of bad guys out there but there is also a lot of good guys out there and we got among our team. And one most interesting thing is there are always lots of new stories about data breaches which Domino’s hasn’t had and god willing we never will but DDoS attacks has really starting to be a nuisance.
You know, in the old days I just had to worry about some kid in the basement. Now I have to worry about organized crime and third-party terrorist states, the banks in New York are being getting hammered all since 9/11 the latest 9/11 with DDoS attacks and they traces it back and those originate in some of the terror sponsored states. So this is a new threat for us we deal with it and we continue to invest so that we can deal with it.
This is my last slide and really what we are trying to say here is if you look at kind of where we are at now Pulse is a great system, our online presence is great, our data warehouse is great, but they are not integrated to the level that we really want you to be able to truly provide this 360 view of the customer.
So as we merge these platforms together, there will still be separate offerings, but the integration points will be very, very tight and will be built around a common data base. There is also some advantages to this from an economic standpoint as we can commonize the platform, we can eliminate some legacy systems and we can drive us onto commodity hardware which will actually lower cost to serve here as well.
And I think I forgot, my grand finale, because Russell and I are here and you guys haven't seen any videos today I brought a video. So this video actually kind of should hopefully sum up everything I just talked about. We tried to write mission statement when I first got to Domino’s around the-commerce and founded it impossible. There are so much we wanted to say. So Russell actually came up with the suggestion he said once you use some technology to show the technology vision. So 2.5 minutes, so let’s roll it.
Spot for us to take some questions on and then we will go into a break. That makes sense. So we will have big time for questions at the end but if there are things from my presentation or my Kevin’s that you want to talk about now we are happy to do that. I guess the one summary that I would put on what Kevin was just talking about is part of what we wanted you to see today and you don't have to necessarily understand all the details of everything that Kevin has talked about today but we've been asked the question often and you know why can't the regional and small players just do what you are doing and part of the point today was to tell you can they do it, could they put up a site and take orders? Yeah.
It would crash often, I mean it would route orders to the wrong store, it wouldn't be across multiple platforms and every new screen that came out. It wouldn't have the analytics behind it; they wouldn't be doing AB testing. You know, why can't something do what Amazon is doing today? You know, what is and the answer is you hire a lot of smart people, almost a third of the people who work in Ann Arbor work in IT today.
The single largest group we have in Ann Arbor. We've got a lot of people out in the field helping the stores and all that but in Ann Arbor you walk in and the single largest group of people we have working in Ann Arbor work for Kevin and we've got a fabulous leader. He’s got a deep bench. He has got a lot of people behind him and this stuff is first of all fun, I mean its really interesting to get into all of this but it’s hard and its expensive and in a lot of ways that's great news because that's competitive barrier.
We've talked often with all of you about the great upside of the pizza business is that the restaurants are relatively inexpensive to build and so the ROI is high, that's the good news. The bad news is its same for everybody else. Why there are a lot of little Mom & Pops, well this is the opposite. This isn't cheap, this isn't easy, it’s actually quite expensive. We've put a lot of capital into it. We put a lot of people into it and its not something that a small player can do at least at the level that we are doing it, building the database and the analytics that we have it is a very differentiated thing that we are doing and not a simple thing for a small player to do. John?
(Inaudible) fully understand everything but it was very impressive nonetheless, just given the level of technology but my question is ultimately I guess your goal would be to get more sort of under one marketing or understanding what individual consumers and I use my app Domino’s its tailored to what I have or you are pushing off or how far long are you in that ability and where, what do you think the next generation of that goes?
We're there. It's a matter of when is the right time to have that experience because what you will see in terms of personalized buying experience and people do it today and some of our other markets do today is you know, there is upsell opportunities all through that core pipeline that I showed you, right and the question is when do you want to make that personalized precision offer to that individual.
And I would just contend that you have to apply the same statistics and analysis to it because there is a time when are people are ready to purchase on an upsell and there is time that they are still in their current flow. So the basic capability to do that exists today. What we need to make sure is that quite honestly it's a good experience because the last thing, you can go crazy on that and try to upsell somebody four or five times in that order change and they are just going to get mad and they are going to leave, right? So what we are trying to do is make sure we apply the science to make sure that we are getting absolute optimum yield for us and it's still a good customer experience.
And I think the answer is do we have the ability to do it today, yes. How well are we leveraging it today, we're very early, we're very early in that cycle. So, you know, we're talking about kind of the AB testing so that any given time, 5% or 10% of our customers are seeing an online ordering for this week that has the boxes down here instead of up there and we're seeing how does that affect the conversion rates.
You know, we're very early in terms of starting to really use the same analytics should [John Glass] get a different offer for an upsell based on this propensity, based on patterns we’ve seen with other similar customers, etcetera, etcetera. We're very early in that but that’s absolutely coming. That’s the future.
Before decades for an independent or small chain producing television or a mail or its just absolutely out of the question where that something that you and just a couple of others could do, and it’s been discussed at the and almost kind of arguing against your data so the data is true and but the opinion might be false but the internet was meant to be the great equalizer especially for the independent to reach customers know local area much more efficiently.
So the question that I have is, with location services on your phone on the computer that’s knows exactly where you are if you do a search of pizza that guy down the street might actually be able to reach you in a way now that no way five years ago he would have been able to touch you or communicate with you to say newly opened, you know what they are having a clearance sale whatever, whatever that might be. So, things like that location and services what you know through the iPhone, through Google what have you I mean is that an opportunity for you and how are you able to begin to take advantage of that?
I think it’s an opportunity, that’s a really sophisticated technology that’s one of the reasons why you don’t see that much called geo fencing and it’s great technology, you not only have to have the technical skills to implement it, but you have to opt into it as well, right. And I am not saying that Mom & Pop won't do it but the level of sophistication to get a geo fencing application to work is a challenge for my organization. I just can’t see some three or four store franchise, independent franchise making that kind of investment because I don’t think they get the yield for it…
So basic search, so if somebody is searching delivery pizza at Miami Beach, we probably are in their bidding on that search that a local could do that but that’s the most base level. You are starting to talk about; I mean geo fencing that's starts to get really complicated and that's something is probably more advantage for us then a real opportunity for the smaller player to play there.
To what extend of international do their own thing in IT and to what extend they are used in US, if you look at the Australian business it like incredibly evolved it’s a second most popular Facebook site in number fans in Australia, I mean argue they are quite of ahead of you in terms of, can you (inaudible) out there, they are doing their own thing, aren't they?
Well, they are, right. So the beauty of our franchise system is and again when you go back, it was a small point that made but opening up the API on Pulse, right. Australia users are point of sales system that one is all over the stores there, right. So the same system that runs in United States runs in Australia, runs in the UK all the dominant digital markets use all the same point of sales system which is develop by Domino’s, but what [Don] and his have done in Australia, is they really have them very innovative on the e-commerce space and they want it to go really, really, really fast.
So what we have done as we have exposed the interfaces into the point of sales system, so they could go really, really fast; but I would contend the Don, he is the thought leader, and his team is very aggressive, so for those markets around the world that want to do that, we enable that, we will continue to enable that; probably for majority of the markets and maybe Rich wants to pipe in. I think they are looking for more about the packaged solution.
That's right, now also I think we have got even with some of the larger markets as we look forward opportunity for more collaboration in terms of development in the technology area as well. So we got this large pool of resources that we can probably deploy even more effectively as we work together.
Thank you. I thought up my question would be the first one about pizza but, I guess it’s about the menu and Domino’s. I guess it’s a two part question more for Patrick I guess in terms of the menu and you showed your menu from 2002 and 2012 obviously it’s changed meaningfully. And I know I have heard you say a number of points that were really at an inflexion points because now you've gone through the menu that you had in the past that you pretty much upgraded I think you’ve said you now love every product on that menu whereas a year or two ago that was the opportunity.
So just I guess two part; one just over the next year or two upgrades are over; I guess menu get broader where it’s more than just pasta and chicken sandwiches on top of the pizza, like what's the vision for the next few years in terms of the menu and what's typically on ’13. I know for ’12 you talked about most of the year it was on smaller add-ons for margin as a debate you want center of the plate traffic driver, so anything about ’13 specifically in terms of is it more about traffic and pizza news or size?
Yeah, first of all we've got things out there that you will see us continue to promote; that we think there are still real opportunities with things that are already out there. There will be extensions around platforms. I think though in terms of overall kind of broad platforms we may still add some new platforms, but I think we are getting close to the point where if we are launching new things we maybe looking at some things that we take off at the same time and so I think the total breadth of the offering probably won't get that much bigger than it is today. I think there are still opportunities for upgrades outside of pizza. I think there are still a lot of things we can do with sides and desserts and other things that are add-ons to the order and there are lots of opportunities for kind of refreshing of things within existing platforms. So things we can do still within Hand-Tossed or within Pan or within Thin Crust and you know new products that can be launched within that.
But the fact that we've now got I think the core of the menu fixed, if you will, is real positive for us, right. I mean we don't have customers that are coming in today that are getting products that we know is an issue. Pan was the last big one in terms of the pizzas that we really had to get right; we think we've got it right. And so now it is going to be a little bit of a transition, but I don't think you are going to see, you know you are not going to see breakfast you know coming soon from Domino’s and the line of breakfast sandwiches and at least not in the really near future. So more it’s going to be some new things, we think we can do new platforms within pizza, refreshing news within existing platforms that are going to drive a lot of it and then sides and desserts and those sorts of things.
And is there a way to characterize ’13 as more of a pizza traffic driving year or side margin type year or how do you think about that?
Nothing that we are ready to announce yet is the answer.
Unidentified Company Representative
I think [Brian] is going to be our last question before break.
Okay thanks, as far as sorry I don't have voice today, but as far as investments, incremental investments in the technology, it seems like you have the people in place. You obviously have the platform in place. As we get this inflow of more online orders that there are more investments that need to be made in 2013, 2014 and then I have a follow-up?
But the question is it seems like you have the people, you have…..?
Yeah, I mean we got most of the people but there are still lots of things as we talked about the data warehouse, as we talked about new platforms. You know, there will still be some incremental additions to people, but there are still lots of areas where you know, where we're going to be investing. In terms of, you know, what that means. Mike will take you through kind of a long-term view today and you know, on these things. So in terms of, you know, how that’s affecting G&A and all that and Mike will take you through all that later on.
But as Kevin has kind of laid out the vision here on digital, we think there are lots of very high ROI sort of investments that we will be continuing to make in the digital world. It is an area where there is not only great opportunity from the overall customer experience and driving satisfaction and driving incremental ticket or frequency, whatever it maybe but also to maybe to answering Jeff’s question a little bit, there is also we think lots of news opportunity within digital and things that are leverage-able for news to bring more customers in.
And the promotion you guys did in the first couple of weeks of this quarter, it seems like the genesis behind that was really to drive higher adoption of online orders; probably a traffic driver too but it seems like that was the genesis behind that; have you ever done anything like that in the past and if you did, what did it do to that online shift?
We really haven't done anything similar to that in the past; I mean that is classic packaged goods bounce back coupon. And so actually there were really three things we were trying to do with that. The first is what you said which is just driving more people outline. So, anytime we can convert somebody from being a primarily phone based order to a digital order, that’s a win for us, so that’s number one. The second thing is, it added more value to the, as we kind of thought about it, it adds more value to the first order, so if you are still doing two medium, two top pizzas for $5.99 and you now get this $5 Domino, five Domino’s dollars for next purchase it is added value to that first purchase by putting that in there at no cost to that order; the only cost is on a second order if they use it.
And if they are placing a second order and it was only good for 10 days that’s incremental frequency, because our customer purchase cycle is the average customer in the US every household orders pizza 21 times year, so you are looking at more than every two weeks. If we get a repurchase within 10 days and when they have ordered from us that’s an incremental order now that $5 gets supplied to that order. So really three things, driving people to digital adds value to the first order and potentially without any cost really on that first order and potentially get to a second order which is where that $5 would get applied.
Unidentified Company Representative
We are going to move to break and we’ll open at (inaudible).
Thanks everybody. Let's get settle back in please. So before I turn it over to Rich to talk about our international business, so are there any other pent-up questions from kind of the first two, before we move into international?
Yeah, hi, can you talk about like, how are you going to use digital and I guess combine that with your pricing strategy and how you want to people away from couponing and dealing into more steady state pricing?
Yeah, I guess what I would say is digital gives you an opportunity for fine tuning around pricing that's beyond anything you can do over the phone and with carry out and we are not doing a lot yet dramatically differently with pricing online, but we know it’s a big opportunity. We are very aware of what you know Amazon is doing and how they are moving prices and tweaking prices you know multiple times within the day for things and there are real opportunities within that. I mean we know where our traffic to our site comes from and where it goes; we know when people are coming to our site from a competitor’s site and we know when people leave our site and go to a competitor’s site and so lots of opportunities within that area, but I would tell you, big opportunity not an area that we are doing a lot yet, but more to come on that.
So Patrick, the cost for fulfillment is much cheaper for an online mobile order, you've talked about that; is the labor significantly less expensive?
It’s less expensive; I don't know if I would say significantly, but it’s less expensive, yes.
Any evidence that that's going to permanently boost the profitability of the store level for you or will that get arbitraged away and serve as a vacuum and the discounts will just get a little bit deeper from the majors?
It depends on how fast the industry consolidates. I mean that is to the extent to which you maintain 85% of digital orders going to the three major players, that's a pretty permanent advantage and that maybe part of what kind of continues the share gains if there's more profitability in those orders. So at some point that's got to be a part of the process of kind of the share gains that are coming against the smaller and the regional players. At some point, if we manage to consolidate the pizza category 10 years out or 15 years out far more than it is today, then you might start seeing more of that being about kind of share passing between the major players, but today, while we have the vast, vast majority of the digital orders really being split up between the three major players, I think it’s a pretty strong advantage that continues against the smaller players.
[Jenny] I think Mitch had a question just to make it run the full length of the room.
Great thanks. Just on the topic of the US business more of a market share gain and the regionals shrinking, can you just give us a sense on this regional group, you know, maybe how many kind of big regionals are out there that are obviously not big enough to be national, not small enough to be independent, just to get a sense of the size of this group and how many there are out there?
Yeah so from the chart I mean within delivery you are looking at about 15% of sales in the delivery category to actually a bigger piece of the overall I think more in the 20% to 25% range of total pizza. So I mean here we are looking at 6 billion, 7 billion, 8 billion something in that order that's going to those regional chains and there are literally dozens of chains out there, you know, headquartered within 50 miles of Domino’s and in Ann Arbor is not only Little Caesars, but Hungry Howie’s, Papa Romano’s, Marcos, Cottage Inn, Jet’s, who I am forgetting, (inaudible) there though, but I think there are six or seven chains with 52,000 restaurants headquartered within 50 miles of our headquarters not including Little Caesars. So there are a lot of mouth there and you start moving around the country and you know Round Table and Black Jacks and Papa Gino’s and Giordano’s and I mean just on and on and on; there are lots of pizza patron; there are lot of these chains out there. So you know, there is a big piece business out there and at some point you look at them and say what differentiates each of these chains, why should each of these chains exist, what is their reason for having a special place with consumers and we just think it's a big opportunity, but there are dozens, not more than dozens of them out there.
Okay, so with that, I would like to pass over to Rich Allison who is going to take you through our international business.
Alright, thank you Patrick. Well, 2012 has been an important year of milestones for us in our international business and I will highlight just a few of those for you here this morning. You know, in Q1 we got our 200th store open in France; as we went into Q2 our largest franchisee by store count Domino’s Pizza Enterprises opened its 900th store. And then we reached an important milestone with our 5,000th international stores 5,000 stores outside the U.S. In Q3, I was in India for the opening of our 500th store; we got to 250 stores in Turkey and we reached an important milestone with our 10,000th Domino’s Pizza Store worldwide. And the pace didn’t slowdown over the last quarter, we got the 700th store open in the UK; our franchisee Alamar Foods that operates in the Middle East opened their 200th store; I was in Malaysia for the opening of our 100th store and we hit 60 stores in Brazil, so some very important milestones in total and then also in some of the specific markets that we operate in around the world. I think 2012 was also my lifetime record for frequent flier mile accumulation as you might guess given that I was present for most of these events.
There are a few things that I am going to cover with you this morning and let me start with just a summary of where I think we are with the business today and how I look at the business going forward. First message I want to leave you with is that our international business is a diversified growth portfolio of regions, markets and franchisees. We have delivered a sustained level of growth in the business and store count growth over the last 10 years running between 8% and 9% every year. We have got retail sales growth internationally growing at just under 15% a year. And when we look at where that growth is coming from, we are getting diversified growth across all three of our operating regions in international. We are also getting a healthy mix of growth across the developed economies that we’re in and the emerging markets that we’re in. We are about, if you look at over the last two years about 60% roughly of our store growth is coming in emerging markets and 40% in develop markets, so a healthy balance of growth.
Our key business drivers are also very strong, so some of the drivers that we look at to give us a sense for the health of the business are first what's happening with order count growth. When we look at our same store sales growth which has been very steady and strong, the vast majority of that same store sales growth in international is coming through order count growth. So we are focused on delivering value to our customers in each of the markets that we operate in and really trying to drive those same store sales growth figures through order counts as opposed to ticket.
When we take a look at our cash-on-cash returns which really helps us to understand how healthy the business is and frankly helps us to predict whether or not we are going to get strong unit growth going forward. We are seeing healthy improvement in our cash-on-cash returns in a significant majority of our markets around the world.
We’re also increasingly as Patrick and Kevin have referenced are taking a look at what's happening with digital and the growth in our digital business around the world. And outside the US right now we do about 34% of our business through digital, so roughly equivalent to the US, we have three of our markets that do 50% or more of their business through digital and I believe nine markets in total that have 35% or higher of their business coming in through digital. So our key business drivers are strong today.
We also play in a very attractive market; as we take a look at the pizza market outside the US, we play in a Total Pizza market of just under $90 billion outside the US. So if you think about our business today we've got roughly a 4% share of that overall market. That pizza market is growing at 3% to 4% per year. So healthy growth in pizza.
When we look at delivery and carry out, we've got a market that's almost $30 billion. Almost $30 billion of that $90 billion is delivery and carryout and that is actually growing faster than the Total Pizza market. We are seeing 4% to 5% growth in delivery and carry out. So, again a very attractive marketplace that we play in today.
We believe we are positioned well for future growth in a variety of markets. And what I mean by that is, we are very focused on continuing to drive and expand our market leadership in the developed markets that we are in today while also continuing to fuel the rapid growth in the emerging markets, some of which are really taking off for us now and others where we are still laying the early foundations for growth going forward.
Today, we've got a number one market leadership position in more than 20 of the markets that we operate in around the world. And we are focused on driving to market leadership in the other countries where we don't currently have that position. We've also got some green field markets that are still left out there on the map.
So some significant pizza markets in significant regions around the world where we don't participate today. So we are also keenly looking at opportunities to continue to take the Domino’s brand to new countries.
Lastly, we've got to manage some challenges as we look forward. As we think about challenges that we have a lot of control over. We've got to continue to stay focused and make sure we are driving growth in our more mature market. We don't want to see our markets slow down around the world. So we are focused on continuing to drive growth there while also making sure that we are laying a foundation for growth in the markets that are early staged for us.
And then lastly, there are macro economic challenges that we deal with of course everyday whether that's currency pressures that we see in certain places around the world or whether its macro economic challenges that you see in places like Greece and Spain. We actively monitor those and try to mitigate the downside impact of any of those risks.
So, three parts I'll cover today as we dig into the topics that I just discussed. First, I will give you a brief overview of our recent performance then I'll talk about the industry outlook and then we will talk a little bit about runway for growth. Where do we hope to play going forward and how do we plan to make it happen.
First, on recent performance. This is a chart to give you sense for our store count growth as we look over the last 10 years you know the red bars are total store count, we finished Q3 at 5,144 stores in the international business. Store count has doubled over the course of the last 10 years, but the line I want to draw your attention to on this chart is the blue line which is the trailing 12 month net unit growth because that gives you a sense for what's happening in terms of the pace of store count growth across our system.
And that has continued to accelerate over the course of the last several years. We were running along for a number of years at about 250 stores of net growth each year that increased in 2010 up to 350, up to 413 for the 2011 year and at Q3 of 2012 looking back over the previous 12 months we were just under 500 stores in terms of trailing 12 months net unit growth. That’s about an 8.5% CAGR over that 10-year period but increasing over the course of the last couple of years. As we take a look at retail sales, we did $3.5 billion worth of retail sales outside the US in 2011 and the compound annual growth rate as you look over the course over the last eight years is just under 15%.
On a trailing 12 month basis through Q3, we were at $3.7 billion. That also includes the negative headwinds on foreign currency of over a $100 million; about a $130 million in foreign currency negative headwind is factored in to that $3.7 billion.
To talk just a little bit more about foreign currency and the impact that it has on our business, this chart gives you a sense for what's happen with our foreign currency index which is a weighted basket of our top 10 currencies. Over the course of the last 10 years and over the long-term as you can see, we've been helped by foreign currency movements but there had been periods of time where it has provided some significant headwinds in the business. Certainly back in the ’08 timeframe, significant challenges with FX and then we felt some of that in 2012 as well where we’ve had some headwinds on the foreign currency side.
Let’s talk a little bit now about how our business has spread across the regions that we operate in. The chart on the left will give you a sense for our 2012 through Q3, retail sales by region and you will see that we got a healthy mix of our business across our three operating region with a little more than 40% in Europe, Middle East and Africa little less than 30% in Asia-Pacific and then about 20% of our business in the Americas.
And when we think about where we are positioned just a couple of points, one is that there is a pretty high correlation when we look at where our brand is strong in the largest international pizza markets with some exceptions as you see here in the bubble to the lower left we don’t have a presence today in three of the largest pizza markets, three of the 15 largest pizza markets in the world, Italy, Argentina and South Africa. And we are not in those markets for a variety of reasons but certainly we continue to stay focused on monitoring them and other places that we don’t operate today.
And when we take a look across the globe, we are relatively more penetrated today in our Asia-Pacific region than we are in Europe, Middle East, Africa or the Americas. So, diverse business across the globe today with opportunities to grow and expand in every region around the world.
When we take a look at where our growth has been coming from over the course of the last couple of years and I am giving you a two year view here. We have opened on a trailing 24 month basis through Q3 at 880 net stores around the world in our international business, 58% of those come in emerging markets. Those are countries like India and Turkey and Malaysia and Indonesia but we are also still getting very strong and healthy growth in the developed economies that we operate in as well.
So as we look at the UK for example, as we look at Japan and we are continuing to get stores open in those markets in France, in South Korea, in Canada, we are still getting strong growth across our mature and developed markets. This chart will give you a breakdown on a country basis where some of that growth has come from. Again the same time period and we got them color coated here with the emerging in blue and the developed in red.
We had five of our markets driving a little bit over 50% of our net unit growth over the last two years. India has certainly been a big performer for us in terms of unit growth. The UK, one of our develop markets is still delivering strong performance. Turkey over the last couple of years has really emerged as a very important growth engine for Domino’s and then I call you next your attention to Japan, with 51 stores over the last two years.
Japan was the market that basically didn't grow for Domino’s for 10 years but a couple of years ago with new ownership and with new management in place, we have been able to recharge growth in that developed market.
Taking a look at our growth relative to that of our top two competitors outside the US, as we look over the last four years, we have had a track record of consistently outgrowing our top two competitors combined. You will see the data here for ’09, for ‘10 and ‘11 and then we have shown you here 2012 year-to-date through our Q3.
And then as translated overtime into gains and market share and for our business outside the US, when we take a look at total pizza, I mentioned earlier through 2011 we had about a 4% market share in Total Pizza around the world that's up from 3.5% in 2010 and then as we take a look in delivery carry outs specifically, we have got a just north of a 12% share compared to 10.7% in 2010 based on our estimate.
We also look at relative market share which I think is a very important fact for us to have our hands around and a metric for us to watch. And in Total Pizza we have increased our relative market share from 0.62 to 0.65 with Pizza Hut being the market leader on a Total Pizza basis and then in delivery carryout we are the market leader in delivery carryout with a share that is 1.7 times our closest competitor. And that's up from just from just over 1.5 in 2010.
So and we've got a market I told you as I told you earlier that's growing, depending on how you look at it that 3% to 5% range, our business is growing at three times or better that market growth rate so we are seeing continued share gains over time. We will shift gears now and talk a little bit about the industry outlook and what we see when we take a look at the pizza market around the world looking forward over the next 10 years.
2011 international pizza market, this is Total Pizza as I mentioned earlier just under $90 billion about an $88 billion market. We split it out by our three operating regions but also called out Italy separately because it is such a massive pizza market due to the very high per capita consumption. So that's 2011.
When we look forward to 2021 and use our best estimates as to how this market is going to evolve, we see about $30 billion worth of additional pizza being sold around the world and there are some significant growth in a couple of key places for us in Europe, Middle East and Africa you know expected to expand by about $13 billion in pizza sales, looking at significant growth expected in the Asia-Pacific region which is labeled here in green from $8.5 billion to $14 billion and then continued sustained growth in the Americas as well. So when we think about what's happening in our industry, we feel very positive about the outlook for industry growth going forward.
Next I will take it down to delivery and carryout. I mentioned just under $30 billion in pizza sales and delivery in carryout today. This is how its distributed across our operating regions and then as we look forward delivery and carryout expected to grow at a faster rate than Total Pizza, just under a 4% compound annual growth rate.
If you take Italy out which is huge today of course but a very slow growth market, the market for delivery and carryout outside the US excluding Italy is over 5% on a compound annual growth rate basis. So putting that all together, couple of key messages, we expect strong growth over the next 10 years $30 billion in Total Pizza, $13 billion in Delco and we expect that growth to be well diversified across our regions.
The second dash year is when I do want to call out which is the Delco piece again, significant growth on the Delco side of the business when we look at the various regions around the world.
And then lastly, the growth is going to be driven by a mix of emerging and developed markets. We are most certainly focused on establishing and growing our position in these rapidly growing emerging economies around the world and that's important because there's going to be an additional $18 billion in Total Pizzas sold there by our estimates and $7 billion in Delco but we've also got to stay focused on these developed markets that we're in today, the more mature markets because they are also going to see a significant amount of growth in pizza sales around the world.
And as we think about how we construct our plans going forward in our portfolio for growth, we're making sure that we have a balanced approach that presses hard in the emerging markets but also stays focused on the developed markets as well.
Last thing I will address today is our runway for growth. And I am going to talk about two components of that. The first is, where to place. So how to think about where we're going to focus going forward and then the second is how to win. So what are the things that we're doing to make sure that we're able to capture the opportunity that I’ve laid out for you today? Where to play? There are a couple of points here.
First, we got to capture and expand leadership positions in these developed markets today. I’ve talked about that today. We're going to continue to drive forward there and I am going to show you a couple of examples in markets where we're getting, the developed, more mature economies where we're getting strong growth in our business.
We've also got to accelerate growth and drive the leadership in some of these emerging markets. We got some great success stories in places like India and Turkey our emerging markets where our business is growing very, very rapidly. But we’ve also got some other places where we're really just laying the foundation for growth and frankly where we got a lot of work to do.
So we're trying to invest in those markets today so that we will have three years, five years, seven years out, we would have laid the foundation for some of those markets to really start delivering strong performance for us.
And then lastly, entering green field markets that offer opportunity for scale. We made our first entry in the sub-Saharan Africa this year when we opened in Nigeria and I will talk a little about that a very strong opening, but we are also continuing to scan the world and keep an eye on places that could be opportune markets for Domino’s provided we could go in there with the right franchisee partner. There are still some significant untapped places around the world for us.
So let’s dig into a few examples of this notion of where to play. And I will start with the developed market example which is Japan. As I mentioned earlier, the market had gone for 10 years basically with no growth, with no store growth. New ownership came into place in 2010 [Bank Capital], a new management team in place and since that time we have really seem renewed growth in this important market for us. 37 net stores through Q3 of this year compared to Q3 of last year which is more than the previous three year period combined.
In Japan, we are driving same-store sales growth while also carving out territories to infill our markets so to further reinforce our position. We had carve outs for 40 stores across Japan over the course of that last year which had led to our store growth but also doing that in a way that still allows us to drive same-store sales growth.
And then importantly order count growth, so you look at 4.8% order count growth we are getting all more than all of our same-store sales growth through order count gains in Japan which is in type of healthy growth that we want to make sure we sustain over time.
Some other notable highlights from Japan, world class digital platforms. This is one of the markets for us that is at 50% digital today. Most diversified menu we have in the system, an incredibly broad and diverse menu in Japan with all sorts of things on pizza that you are going never to think to put on, but lots of sea food, mayonnaise many other toppings that we don't see much up here in the US but are big sellers over in the Japanese markets.
Exactly, and they always, every year always come out at that in December with the most creative pizza we see anywhere in Domino’s. And then the last point here is that for us in Japan, the business has been very Tokyo centered overtime. We are now starting to see new stores performing well outside of our major city centers.
And carryout has been a real driver of that, historically in Japan the business was more than 90% delivery but as we move out into some of the suburbs and some of the smaller markets we are able to get a little bit more real state, bigger square foot stores, we are able to get some parking outside the stores and that’s enabled us to drive the carryout business there which has been a contributor to us on order count growth.
I will highlight Germany now, and Germany is an example of a market that is relatively new to us because we just opened in 2010 as you know, we transition the ownership of that market and that market was sold to Domino’s Pizza Group out of the UK and they have really come in and begin to provide a strong push in moving this market forward.
In 2012, 12 new stores opened and that's off of a base of five, so very rapid ramp up on growth there and we are seeing strong same store sales growth in our mature stores in the East. Most of the new development is occurring over here in the West and we expect to see another year of double digit store growth coming in Germany. This is a market that was tough one for a long period of time. If you spent time in Germany and try the pizza in Germany over the last 15 years it was some of the worst pizza in the world, as I think Patrick and Mike would attest to. But the quality of the pizza has improved and consumers’ appetite for higher quality pizza that they are willing to pay a little bit of money for has also improved. There are a couple of local brands in Germany that have significant numbers of stores. Joey’s and Halle Pizza, you know both of which have grown and been successful overtime and we feel like there's a very strong opportunity for the business in Germany particularly with a partner that we have now with a very proven track record of performance.
Next I will talk about India which as all of you know has been a fabulous performer for us in the Domino’s system led by Jubilant FoodWorks. It is our fastest growing market, yet again in our system. I talked about the 500th store that was opened in August. The team at Jubilant has told their investors that they expect a 110 openings in their current fiscal year which ends in March, so growth continuing to accelerate in India. And that's while still driving greater than 20% same store sales growth through the first half of their fiscal year. They are also significantly expanding the footprint across the country. We now have Domino’s Pizza stores in 112 cities in India versus 96 a year ago. We know that the market is expanding rapidly. We know that competitors are also excited about India and coming in, but we are very focused in working with our partner Jubilant to accelerate the pace of growth so that we continue to maintain a strong leadership position in that very important country.
A few highlights; absolutely world class operations and training programs; in order to be able to open a 100 plus stores per year and do it successfully and still deliver strong same store sales growth, you've got to train great managers, you've got to train great supervisors to run those stores and Jubilant has developed an absolutely fabulous store operations and training programs; one of the keys that's allowed them to be successful. Robust digital ordering platforms, you know lower than some of our other markets at 14% compared to Japan or Australia they are just not as much as digital commerce in India, but the foundation is there and we expect that to grow overtime.
The customer experience delivered by our team in India is absolutely fantastic and if you go into our stores you will see that they are the place to hang out and to go eat for young people; just a fabulous experience that they are delivering there. And then in order to support that growth our partner in India is making big investments in their commissary network to support that accelerated growth and when you open a 100 plus stores a year you got to make sure you've got the supply to the stores as well.
Brazil, another very important emerging market for us; we opened in Brazil 20 years ago now, but with very little movement forward over the vast majority of that time, that pace of growth has really begun to accelerate. 17 net stores opened in the trailing 12 months and our 68th store opened before the end of the year. So we're excited about the progress that’s been made in 2012 in Brazil and we expect our team there to continue to drive the brand forward very aggressively.
A few of the highlights; you know, we got some alternative store formats in Brazil, you know, that include having some of our stores in the food courts and malls. There is very strong mall based culture in Brazil. So that’s a good location for us there. And also we’ve co-located some of our stores with Spoleto which is a second QSR concept that is operated by our franchisee in Brazil. We are in Brazil with the celebration of our 5,000th store opening earlier this year and they continue to invest in the business, not only in stores, but also in their supply chain center as well.
Last market I will highlight for you today is Nigeria which we entered in August of this year. First Domino’s Pizza in West Africa and we got two stores today and the stores have done exceptionally well. It's only two stores again, but it is our highest per store weekly sales averages that we have anywhere in the world; absolutely unbelievable, doing well over twice the volume of an average Domino’s Pizza store; so a fabulous start in Nigeria. We got a committed and a passionate team and we're going to be very focused on this market and learning in this market because Africa is still a very much an untapped opportunity for us. So this is the first foray in the Sub-Saharan Africa for us and I think there is going to be a lot of, lot of very useful learning for us that we can then take forward into our future development plan.
So that’s just a couple of highlights around how we are thinking about where to play and how we are thinking about driving the market leadership; let’s talk a little bit now about how to win. And I will hit three points here, one is establishing shared vision with our franchise partners; making sure that we are aligned with the right resources against the priority opportunities and then finally to piggyback on some of what Kevin talked about earlier deploying and leveraging our technology.
So first on the shared vision; we are very much engaged with each of our franchisee partners, to craft plans, to drive the leadership in their markets. Now, today we have got leadership in total pizza in 21 of the markets that we play in, we are number one in deliver carry out in 29 out of the markets that we play in, but where we are not the leading player, we are working with a franchisee to craft plans to get there and where we are already the leading player, we are working with them to craft plans to get to two times or three times the size of the next player, so we are very focused on relative market share and leadership.
Second is providing leading franchisees with opportunities for growth, when we have a market opportunity around the world that is either untapped today or where we are not doing a good job executing, we are opening some of these markets up to existing offers, you have seen us do that several times over the last couple of years with Domino’s Pizza Enterprises out of Australia took on the markets of France, the Netherlands and Belgium. We have had Domino’s Pizza Group which I think out of the UK which is expanded into Germany and Switzerland also with the rights to Austria and we have our franchisee partner out of Turkey which is now taking on responsibility for the Russian market for us.
So where we have got great aligned partners we are helping them find opportunities for growth. And on the flipside of that where we are underperforming we are very actively intervening to make sure that we can either fix those underperforming markets or if we don't have the right partner in place working to make a good and thoughtful transition to a new partner that can help us take the business forward.
We are also increasing our resources in international to help us drive against these priority opportunities. So over the last couple of years, we have added capacity to our field teams and strengthened their capabilities and that allows us to reduce the spans of market for each of our field team members looks after so that we can provide more focused support. Also in our franchising managing teams, we have had a few of our folks leave to go and take significant leadership positions with our franchisees. So the director over the market in Germany today, used to be our Regional Vice President for Europe, Middle East and Africa; the director over the market in Switzerland was also one of our team members. So we are seeding some of our markets with talented leaders as well, because there is absolutely no question that the key enabler of growth in any market that we operate in is having strong leadership in place. We are allowing our field and development teams; we have our teams focused on the highest priority opportunities in making sure that we invest significantly in those places where we believe we can get strong growth in the future.
We are building our distribution consulting team, you know as these markets grow rapidly, the need to open and expand the distribution network and the commissary support system that's in place is a very real need to enable the growth. So we've increased the resources in our team to help our franchisees get that done. We developed a centralized insights capability, so we are now doing just as Kevin talked about more and more analytics on the data in the US; we are adding capacity so we can do more and more of that with our franchisees internationally as well to help them identify and capture the opportunity.
And strengthening our business support teams, we've added resources to our training team. We've added resources to our financial analysis team; we've stepped up the support that we get from Domino’s Pizza Corp, our global entity, we've stepped up the support that we get in IT, in legal and in human resources. So we really are trying to make sure that we put the right support behind our field team members so that they can really act as the quarterbacks in the market and pull whatever resources they need to help us drive growth, because that speed limit around growth can be different in any given market; in some places it can be real estate, in some places it can be capital and in some places it can be people, in some places it can be unit economics just aren't right. So we are trying to make sure that we bring the right support to help remove those speed limits and drive the business forward.
And then I won't spend a lot of time on technology because Kevin covered it pretty well, but we are very focused on rolling out our global POS system. I will show you a chart in a second but we are now at over 50% of our international stores are on our global POS. Very important and the second bullet we are also unlocking the full value of Pulse by bringing some of the management tools that layer on top of it. Our franchisees in the US have a great suite of management tools under the heading of Pulse web reporting that they use to actively manage their business on a week to week, day to day, hour to hour basis. We are starting to bring that out to our international franchisees with Kevin and his team’s help.
And in online ordering in mobile absolutely huge for us in international as well as I mentioned earlier and we are doing more to collaborate with Kevin and his team so that we can bring a suite of tools to our markets many of which can't afford to build them themselves. The larger ones that we have Domino’s Pizza Enterprise, Domino’s Pizza Group and some others you know they can afford to build some of those tools themselves, but many of our mid sized markets can't and we think we've got a lot of untapped opportunity by bringing a packaged suite of services to them.
Just a brief page on Pulse here to give you a sense for what's happening there; again, we crossed the 50% threshold this year and we've got 16% of the remaining stores already signed. So they are in the queue for Kevin and his team to implement.
So to summarize, we've got a diversified portfolio of businesses and what we are trying to construct is a mix, you know a mix of growth opportunity across regions, across emerging and developed economies so that we can continue our track record of delivering sustained performance across the business. Key business drivers are strong. I talked about a number of those. Order count growth, same store sales growth, cash on cash returns, relative market share improving, we are also getting significant advancements in digital ordering.
And an attractive market, we are, Patrick talked earlier about international being a scale game, so we got opportunity with the size of the market today and the expansion that we expect, we got a significant opportunity to continue to grow and continue to drive to scale the international business. Obviously, we want to continue to gain share along the way as well, but the opportunity for scale is there. And then we believe we're positioned well for future growth across a variety of markets as I described earlier. So we keep our team focused on these opportunities. We are making sure that we resource them with the people and the capabilities that they need and we're also making sure that we bring the technology to bear behind to support them.
So that’s what I had today.
Thanks. My question, Rich, is about the re-acceleration of the pace of unit growth. Is that a function just of better unit economics, knowing the country is a little bit better or is there something else going on there?
The story can be a little bit different anywhere in the world, where you are looking but, unit economics is the key factor and when we get strong unit economics, we get growth. It's one of the reasons that we look at it very closely. And the way I look at it is, if I've got cash on cash payback of three years or better, I know I am going to get growth in that market. When that cash on cash payback gets to two years or better, we're going to get very rapid growth in that market. So a lot of what we're focused on is trying to help our franchisees improve those unit economics.
Just a couple of questions, you talked a lot about the level of support being provided to the international franchisees; is that a step up from what has been done in the past; is the core structure changing little bit and just your relationship with the international franchisees, is it a simple royalty based model, is there any consideration ever to invest in some of the higher growth markets?
So I’ll try to address your first question, what we are doing on resourcing is really a continuation of some of the initiatives that Mike had in place when I came on board, so we have been continuing to add to the resources across not only the field, but in the other areas, so it’s a continuation of that. Yes, also about what impact that has on our economics, with the pace of growth that we have got in our business we are able to add resources and still maintain or decrease our G&A ratios in international. And then the third part of your question, once again?
We like our master franchise model quite a bit for the obvious reasons that it’s a great return on invested capital model, there is terrific cash flow, but also that it really gets our franchisees very motivated to drive their business forward because they are sharing a significant upside if they perform. So, we never say never, but we are very focused on that master franchise model and we think it’s worked very well for us so far.
Following up on that, on Joe’s last point on the ownership structure of the international master franchisees, obviously there has been a lot of wealth created for about the public companies and the private equity capital providers backing these firms; I can't help but notice what Burger King has been able to do in a lot of either newer developing markets where they are able to extract 20% or 25% ownership stake with essentially no capital contributed which would essentially be the holy grail. Given the unit economics in some of these markets isn’t there an opportunity for Domino’s to perhaps share on more of the upside than rather than just the royalty increases?
You know certainly, we look at every opportunity that does potentially arise, but again, I come back to you know the fact that, I think this master franchise model, I think it creates great economics for us; we have seen pretty significant increases in our equity value as well driven by that, but also I think it gets a great motivated and aligned partner and place in the market. I don’t know if you have anything to want to add to that Patrick?
Yeah, the only thing I would add to that is at the end of the day for this whole model to work, we are looking at the economics for first of all we have a compelling consumer relationship and proposition in each of these markets. Then how are box outcome, are the stores are doing well enough that's you’re going to want to build more, the reason Japan reaccelerated on growth is we got the box economics fixed, once they were fixed you know they were off to the races. The next thing is how are the master franchisees doing, are they making a good return, is that going to attract capital in, and then the last thing is are we making a good return on it.
If we look at it and said you know there is really excess return going to the master franchisees we've got this mix wrong between how much they are making and how much we are making. Frankly in terms of the way our shareholders base is going to look at it, I'd probably have more of a propensity to try to bump up the royalty rate because that's going to come through an income stream that necessarily capture a percentage ownership that's going to be kind of difficult for our shareholders to value.
That would be my god now that said there is in any big scale market there is virtually no opportunity to increase your royalty rates at this point. They all have very long-term contracts so you are not going to see that happening.
And the other thing I would say is if you want more direct exposure to international you've got the ability to buy over a half of them directly as investors and are doing making that investment for you, I don't think necessarily adds any value that you couldn’t add yourself by deciding to buy into Jubilant or buy into Australia or the UK or the Mexico.
So I would tell you that the one reason we would ever consider investing directly in a market would be if we were convinced that only with our direct involvement would that market grow as fast as we think it should be growing and that hasn't happened. That's the one thing I would hold out but in terms of taking equity positions and all the rest of it, if I think that the economics are broken and we are going into a new market, I'm more likely to say hey you know what instead of doing 3% let's do 3.5% on this next deal than necessarily trying to taking a minority interest that is going to be a liquid and its going to be tough to value. Thanks.
Thanks my question actually leverages off of that which is I've never been entirely clear who pays what royalty internationally I think that's because by design you maybe not chose not to disclose it, can you maybe rank them in terms of who pays the most, who pays the least or kind of a spectrum?
Okay. And then secondly, could also then discuss you sort of said with regret there's no opportunity near-term to raise the royalty so that's probably a long decision made long time ago, have you made recent decisions in the most recent markets that you talked about in changing that structure so you got more frequency now? So what is it maybe a hypothetical new agreement look like I guess in terms of that structure?
Yeah, really what we base, it really comes back to the economics and in a smaller market they are going to tend to pay a little higher royalty rate. There's not going to be an opportunity necessarily for sub franchising. If its going to be heavily, if it’s a large market whether its going to be a lot of sub franchisee, their income stream is going to come from the spread between what they charge and what they pay us and what they make selling food to those franchisees.
So and our cost of support is higher. If we go into a very small market and we've still got to send people in and they are only going to be 10 or 20 stores there, we've got to charge a higher rate simply because there are still certain things we are going to have to do in that market that our costs don't get a spread across.
But really I mean probably ultimately to the point as you are modeling this out, our average royalty rate is right around 3% and you are just not going to see much of a change. I mean you are just based on where we are in the length of the contracts we got in some of these largest markets, you are not going to see a material change in the royalty rate over time.
(Inaudible) and it’s hot if anyone would like a pre-lunch slight sampling?
A late morning snack of pizza to go along with what will be lunch later; [Lindy], do you want to take just five minutes, grab a slice from back and we will wrap up with Mike and then take more questions. Thanks.
Do you break out what percentage of your market have (inaudible) three-year payback?
No we don’t.
So with that I am going to turn it over to Mike Lawton, our Chief Financial Officer, Mike is going to take you through all of these things play into the numbers and eventually our long-term outlook.
Thank you, Patrick. While Patrick, Rich and Kevin all talked about things at a little bigger picture and a little more strategic, I will take you through some highlights from the year in a few details. I know everybody would like to know about fourth quarter. I obviously can’t talk about that. I did want throw up a few details about what we were able to do in the first three quarters of 2012. We are real happy with the fact that our EPS as adjusted came in at 17.9% over the prior year, most of the differences between the reported EPS and the adjusted came about because of the refinancing that took place earlier in the year and the cost associated with that.
EBITDA was running up 7.4%, the number that we are quite satisfied with. Same-store sales plus 2.4% most of that in the first three quarters was coming out of ticket. We had said we were slightly down on order count but our goal was to get the positive order count by the end of the year.
Rich kept stressing the fact that orders accounts the way for real growth that’s the way we feel about the US as well. International same-store was up a solid 5.1%. Back in April, we did pay a $3 per share special dividend and that came about after the refinancing of the company.
And up through the end of the third quarter, we've repurchased 1.3 million shares of the company stock. Some non-financial highlights, we got the APS refinancing done in March. Our refinancing is in asset back securitization, it’s a second time that we have done one, I am very happy with the results of that, and I will talk little more about that.
On the digital, we got to the $1 billion mark on annual basis for the US business and we are now at a point where about 40% of our delivery orders are taking over the internet or though other digital means. And one thing it wasn't talked about earlier today is the fact that we have changed our logo and we have a new store design.
The store design was implemented in a number of stores in the third quarter and more in the fourth quarter. We don't really have an idea of what is going to do for sales directly. We do very strongly feel that we need to update our brand. We need to update the look, we think that we have a design that is the right one whether we can measure paybacks or not. If we really get strong sales paybacks, we will talk about that more at the end of the first quarter or even more likely more at the end of the second quarter, but we are going in this direction one way or other. We know that the customers like this and we need to do to stay fresh.
The good part about the store design is that if you got an existing store and it doesn't have the space to add tables or chairs which we might do in some stores, you can do retrofit for about the same cost just slightly more than we were doing before. If you want to add drive through, if you want to add some seating, we put a little more provision in that for the way we design the stores and we also tried open them up, so if you are carryout customer you got more visibility of the kitchen.
We will talk more about this when Russell see you probably in Q1 on at a later date. Our product news for the year, we had three real launches Parmesan, our bread bites early in the year which was a side item. It was definitely intended to help ticket and help profitability at the store level which it did.
We launched a gluten-free curst obviously a very niche business, a product that tastes very good considering that it is gluten-free, something that customers were asking for and obviously not a big part of the business but something we felt was the right thing to do.
The last product that we launched during the year was launched in Q4, our Pan Pizza that is certainly a big and meaningful part of the pizza category in the United States. The product that we were selling was not something that we were particularly proud of. We think this is a much better product. We hope that it’s got a lot of long-term potential for us. We will talk about the numbers for that and what it’s done when we get to the Q1 results and that will be on February 28.
Turning to international as Rich mentioned earlier, opened our 5,000 stores had great store growth in the first three quarters. We are now at 75 consecutive quarters of same-store positive sales growth in the international markets and we did open in four countries this year with Nigeria probably one of the bigger opportunities also Macedonia, El Salvador and Thailand.
Turning back to the refinancing that I mentioned, we currently we went out in March. We refinanced and took on $1.575 billion of asset backed securities. These unlike our prior bonds these do require that we pay some amortization next year that will be about $24 million to $25 million of required. Once we get to the point that our debt to EBITDA ratio goes under 4.5 times which everything going right should happen in the not too distant future, we have the right at our option to cease further amortization.
We also have a $100 million [BFN] all we have used that for at this point is to back stop some letters and credit primarily for our health insurance programs. So we have adequate access to financial, adequate access to credit if we need it. We are a company that's used to dealing with leverage ever since being Capital bought this business in 1998. We had significant debt on the balance sheet.
We've been as high as 7.2 times when we went out and refinanced in 2007. I don't think you are likely to see us do that again with the refinancing. We certainly are more comfortable with numbers that are under 5 or 5.5 times EBITDA. We would have liked to have refinanced without the amortization but that was not something that was acceptable to the bond markets.
So we will be working that number down a little bit over time. It does affect the way we think of other business, but it works great. We don't have a lot of operating leverage. The fact is operating leverage in the pizza business is more at the store level than it is at the franchise store level.
We do have the commissaries that have a little operating leverage. We do have stores that have some operating leverage but we only have about 400. Overall this is a very, very stable revenue stream for us and therefore we think it’s appropriate for us to carry a fair amount of leverage which we do and intend to going forward.
Looking to 2013, we are seeing different comments on commodities. This year and what we'd experienced up through the end of the third quarter was we had very, very little commodity inflation in 2012. 2011 we were up 6.8% then it was very flat. Our best projection right now is that we will be for our basket that we sell through the store which cheese is the biggest component, meat second and then you've also got wheat and boxes and other toppings. We're looking at something we think in the 3% to 4% range and about 30% of our purchases for next year are locked up. So the variability will come out of the other 70% and we will update you each quarter if this looks like it will change.
I would point out that or should point out that back in 2011 when we did experience a 6.8% increase in food cost, our franchises were able to manage through that and still increase the profitability at the store level. If we do experience a 3% increase in the food basket, about a 1% increase in ticket, all other things being equal to cover that.
Turning to G&A, we're projecting next year to be in the range of $224 million to $228 million. This year, based on what we said at the end of the third quarter, we're looking at 216 to 218. So you are looking at an increase of 3% to 4%. Some of that is inflationary. Most of the rest of that is because we're still continuing to put more money into both IT and international, not necessarily incremental from where we are today but also the fact that some of the hires that we did this year will now have a full-year in next year in .
When we held this investor conference last year, we gave you an idea of what we thought would be coming from G&A. This year actually ran significantly lower. It was not because we wanted it to as much as because we couldn't get some of the hires in place as fast as we liked in those particular areas.
We're not projecting significant headwinds or tailwinds from currency based on our basket of currencies and when I say we're not projecting what that means is I am looking at the consensus of group of banks from around the world what they expect for next year to be, we apply to that our work expected revenues by country and come up with what does that tell us.
Right now, it looks very, very tame. This year through the end of the third quarter, we had taken about $4 million of pretax hits on currency versus the prior year. So next year we are going in with the expectation that are to be flat obviously that could change. We do not hedge currencies. So, we are subject to the volatilities in the market the reason we don’t hedge it is we don’t think we can out guess what’s kind of going on with currencies and we just think it’s a right approach.
If we were to have a 10% movement in currencies all in the same direction whether it be upward strengthening or weakening, are not a likely occurrence but if it did happen it would cost us about $0.12 a share.
Since 1999 when I have been here we have not had anything close to that level of experience. Rich showed you the slide before that showed kind of the ups and downs and when we have been anything close to that but we certainly could see some volatility over the year.
Last year we showed an expectation of tax rate going forward and this is not just for next year but out into the future that our best guess was it we were looking at something into 38% to 39% range. I actually think it’s a little closer to the 37.5% to 38.5% borrowing a major some major event. So if you are modeling out that’s probably a little closer to where we think we are going to be.
CapEx, we continue to think we are going to be in the $25 million to $35 million range. Going forward, that is similar to the range that we laid out last year. We don’t require a lot of capital. We are a franchise model, most of the money that we invest in capital is either going into technology and as Kevin said we were doing some funds to redo our point of sale system, we are continuing to do funds to expand Pulse. Pulse or point of sale as well as online and some of the digital applications and we have got some things we have to do with enterprise systems which we are not talking about but the fundamentals systems that we need to continue to run our business effectively.
And we also put some money into our supply chains, some of it is just renewals and betterments in the United States but there is also a couple of things we are doing like product traceability that are required at the legal reasons but also required because we think that may help us capture overtime some additional efficiencies that are available on the supply chains.
And the other thing that we are doing is both; we are investing in our corporate stores. We got today 386 stores, we think that's about to right numbers somewhere in the 380 to 400 range, yeah, you may see us add a few, you may see us sell a few, but because we believe the one thing you will see in the next year because we believe that the reimaging is important, is we are going to lead the system in that direction and we will be putting some money into reimaging the stores.
By the end of the year, hopefully we will have 25% to 30% of our system up of our corporate stores done. And we would like to encourage our franchisees to move in that direction. Earlier, Rich talk about the fact that he is looking for cash-on-cash returns in the international market, making sure that the franchisees have good profitability and we have talked about that as one of our issues in the United States. Now over the last 10 years to 15 years we have not had much store growth, we know part of that is because franchisees need to be excited by the potential financial returns that they can get.
We have been doing a good job and they have been doing a good job. Since 2008 which was the low point when they were doing about $50,000 per store on average excluding what it cost to pay managers, so if you are a one-store franchisee that's after you’ve paid yourself a manager fee. The real financial return on cash flow was about $50,000. For 2012, we are certainly projecting this is going to be a lot closer to the 75 mark and its gone up each year in between. That's getting us into the range that we feel a lot better about and our franchisees feel a lot better about. But we would still like to keep working that up. And sales are up and that's helped get the profits up but we think there's other places to get profit improvements.
One of the things that we spend a lot of time on is getting smarter about our marketing. Obviously, Russell, our CMO and the marketing department try to make sure that digital purchases are efficient and mass media purchases are efficient, because that's where they are spending their money. But they have also been spending a lot more time trying to look at the coupons that are in the stores and franchisees have the ability to add coupons. They can select their own price points. That's not necessarily good; I mean they want to feel good because they have control. They can say it’s my local market need, I'm competing against this. I'm competing against that; we know that in many, many cases what that really results in is down-selling the ticket and its actually selling product cheaper than what they needed to. And we are trying to apply some of the same approaches that we've used with our ROIs on media mix, our ROIs on digital to our ROIs on coupons and say if these are done lets quit doing them or let's change them and we are trying to get better about providing advice to our franchisees some of them have accepted it; its more that we prove that we can help them the more impact we get there.
So besides couponing, we've also been very careful with our promotions. Earlier in the year we very intentionally went out and pushed side items which were about driving ticket, driving profit. We are also trying to encourage carryout which is an incremental opportunity for us in many cases, our carry out business continues to grow each year as a percentage of mix and in total and we are going to keep pushing the online.
We also have some real opportunities to improve store profitability with operational changes. There are a lot of times when you think of a store you are looking at something that's got $600,000 or $700,000 of revenue and you say well, if the line item on that for energy is 3% or 5% of cost say that's $30,000 or maybe I can save a little, maybe not, its not that much money. But if you take that number and say, well, I could save a $1000 or $2000 and now you have figure out how to do that multiply it by 5000 which is the number of stores we have in the US you are saving $5 million and you've got to think, we have to think more in those terms.
And there are a number of expense areas that we have not been particularly good and focused on about saying can we squeeze some cost out. So we've been in some cases trying to do more to work with national vendors to use our buying power with our 18 commissaries and 400 corporate stores to get contracts that our franchisees can ride on and that has helped us a lot this year particularly in the energy area and in some cases with buying bandwidth and in telephone needs.
We are also doing some things in supply chain to help with really looking hard at excises and trying to take some costs out on packaging and then we are continuing to leverage our early week, day parts. Early in the week, the Monday, Tuesday, Wednesday you’re running a store the fact that there is a lot of the labor that's in those stores, acts like fixed costs, if we can push a few more orders in there which we have done with some very specific promotions that's good for the profit at the store level. In many cases you are offering what looks like a very good discount to the customer and you are still making more money with because of the way they are cost at. You have to be real careful because you don't want to cannibalize your weekend sales; you’re going to be at higher prices and we are trying to monitor for that as long as we are careful this is a good way to go.
So updating a long range outlook; we have typically tried to put numbers around what we think global net units are going to be and they are highlighted in green because instead of saying a range of an absolute number of stores, we changed it to a percentage because as it pointed out to me last year, it seemed like every year or two we were changing that range even though it was suppose to be a longer-term outlook of where do we think we will fall most years. So we’ve changed this and we're now saying that we think that we will be able to generate net new additional stores in the 4% to 6% or whatever the beginning of the year base was. The vast majority of those will be coming from international, but we do hope that you will also be able to see some coming out of domestic in each of the next few years.
Domestic same store sales; we’re continuing to project that more likely or not over the next few years it would be in the 1% to 3% range, which is the same as we’ve shown before; International at 3% to 6%, which again is unchanged from last year; global retail sales goes up to 6% to 10% and that is a function of what we're looking at with the global net unit growth. CapEx remaining at 25% to 35% as mentioned earlier and the tax rate consistent with what I have said.
Turning to use of cash, we generate a lot of extra cash, above and beyond what we need for reinvestment in the company as long as we remain a franchise or with the business models we're using today. We're looking at somewhere, you know, well over a $100 million of free cash and we got three options with that, we can pay down debt or we can buyback stock or we can pay dividends. The one thing I can tell you we have no intention of doing near-term as paying down debt any faster than the required amortization, so that one is off the board. We have been paying dividends occasionally with special dividends and for a period of time about five years ago, we did have a regular dividend. That is something we're continuing to assess and we also do use some of the cash for stock buybacks. I think it's highly likely to expect that most of the free cash will be returned to shareholders; it’s just a matter of what form it comes in over the next few years.
With that, I will open it up for questions, not just for me, but for the team.
Thanks. You just talked about the cash flow and obviously I think everyone here knows you have a very strong free cash flow model and the dividend question consistently comes up, so why not do a common dividend or why keep doing special dividends; can you just let us know exactly how you think about one versus together and where you are at today?
Yeah, look we absolutely look at it and it’s something that we have an ongoing conversation about and it’s something that we are going to continue look at and it’s I think we kind of talk through when this type of question comes up often but that’s not the reason to do it, the reason to do it is because we think it’s going to generate a good return for our shareholders. Clearly, if we became dividend paying stock at an ongoing basis there is a certain group of investors that we could attract that we don’t attract today. On the other hand, our ROI over the past few years from buying back in shares has been awfully good for our shareholders; it’s generated a lot of value for them. So the answer is it’s something we continue to look at and we are going to continue to look at but certainly don’t have an announcement.
Thanks. So Mike you talked about the remodels, reimaging as being an important driver for the future. Is that something that you anticipate going forward for the company stores and hope it can stand on its own ROI for franchisees to then be compelled on their own device or do you need a care or a stick to get them to do it and what pace might that look like?
I think the pace differs somewhat dependent upon what we see in terms of consumer response and whether we do see significant uplift in sales as a result of the re-image. I think most pizza companies that have a lot of delivery have not historically seen a lot of pick up in their sales just from reimaging, we haven't in the past, we are doing some things that are much different than what we have done with just a cosmetic change, if its there that certainly gives us a lot of reason to be able to step up and push harder and encourage harder whether it would be care, whether it would be stick. But we also have some late on the stick side to tell franchisees they got to upgrade their stores. Depending upon what the results are, I think has more impact on the timeline, the results that we see over the six months will have more impact on the timeline that we get all of our franchises to switch as opposed to whether if all do it; many already ready to upgrade their stores, they have been waiting for something, so some is going to happen naturally, at some point we will probably have to kind of push a little bit and in the meantime all new stores all re-images, all relocated stores are moving to new image.
And what are your actual rights under the contractual agreements today, if you choose to pull the lever, is it only when they re-up for a 20 year or you can do it more media and what are the actual terms?
Right now, I am speaking specifically about the US and in the US those contracts do have requirements that as a franchisee you have to reinvest a certain amount in your stores. So if you haven’t been reinvesting and we want you to do the re-image your contract and obligated to and most of the stores that we would feel strongest about needing to get the done the soonest probably fall into that category.
Thanks. Mike, I am just thinking about, for most of the restaurants we look at restaurant margin for you guys as a permanently franchise business it tends to be focused more on operating margin and now you have a couple of peers that are also very heavily franchised and a lot of attention paid to the operating margin in the franchise business in general. So I'm just wondering I mean I look over the past few years it seems like kind of the adjusted operating margin you now pushed north of 30%, it seems like it’s up four or five percentage points over the past two years which is obviously a nice move in the right direction. I am just wondering if you can frame for us maybe the long term thoughts around how you think about that, because obviously the real lever for you guys is the G&A savings rather than restaurant levels; I am just wondering if you could talk about the long term opportunity maybe what limit there might be on the top side or where you see the upside coming from, or the limitations on opportunity on that operating margin we've seen people talk about or you can get to 40% or 50% as a franchise business of your size, so how you think about that?
Well, it’s a really tough thing to answer because you've got three different components flowing in there. You've got the royalty income that flows in from franchise ops whether it would be domestic and international both of which are very high margin businesses. And both of which should be able to generate some incremental margin versus what they are doing on a segment basis each year, but they are already very high, you've also got the commissary businesses both in Canada and the United States and those are businesses that while I love them because they've got a good steady cash flow, the return on assets is fine, as a percentage of sales those are a low margin business. And then you've got the corporate stores which have been much improved over the last few years, but still compared to the franchising business also have a lower margin. So what you've seen over the last couple of years are improving margins in all three segments but you've got to change in the mix of the segments that probably overwhelms what happens as you are doing the margin, because if we sold off corporate stores that might there gives you a bump; so it’s a bit hard to focus on that percentage, but it can go up beyond word.
And the distribution business margin because of the way we price you know as commodities move that percentage margin actually winds up changing, so you are making kind of a fixed penny profit. The only thing I would say is that overtime the answer is margins are likely to trend up simply because international has grown a lot faster than the domestic side of the business and that's a high margin business, because it is you know, it’s essentially all about the royalty side of the business. So generally the trend is going to be up just because of the mix between international and domestic. As long as the business model is same and it’s purely franchised and we don't own any of the supply chain business other than Canada, the growth of that business versus the growth of domestic business would mean you are going to have at least some modest general increase in the margins.
I guess those three components I guess they will stay at a steady state perhaps; or would you think that would grow overtime?
If the revenue percentage stayed exactly the same for each of those three components and based on what's happened in the last three years you would still see improving margin. But in how much I don't know, I haven't run the number.
Yeah. I mean it can still go up, but again there's a huge difference between the margin and the franchising business and the margin on the supply chain. There could be many, many, it’s a huge spread, so the mix really overwhelms the other changes.
Yeah, actually a follow-up on Jeff’s question, so can we talk about the supply chain segment in general in the US; it's still over 20% of your operating income and you know, it can be easy, from our perspective take it for granted, but you know, as you’ve had been in your roles and had a chance to look at things completely fresh like you obviously have with the US stores and like you have international; I mean do you have a chance to do any restructuring or look at that business in a different way that there could be some kind of material step up in profitability while still maintaining your service standards that you currently have and that could be consolidation, it could be fold outs or contracting any number of things that you may see, you know, again just trying to clean slate that business?
We have done some consolidation of supply chains over the years but there are currently 18 and there were 36 at one time. So we're at a point where the question you ask yourself about further consolidation is what I am going to say on the manufacturing side versus what do I give up on the transport side and that’s kind of the key equation for us. So for right now given where we expect our fuel cost to be given the cost of one in these commissaries, there is not a lot of opportunity, but we're continuing to look at them. We've done two in the last five years that we've changed. So we will continue to look at consolidation that way. We rent and run our own trucks and part of that is to make sure they are clean and they are done the way they want. So we looked at outsourcing that. We would continue to look at outsourcing, but we probably won't do it based on what we've seen so far, but there are also some opportunities to run the commissaries series better. There are always ways you run, call the small manufacturing plant distribution business, you can always look for better ways and one of the things we're investing in a way of technology is this product place-ability and we're hopeful that that’s going to give us some better visibility that may also help us cut some costs overtime.
The only thing I would add to that John is, I think, the real answer is as we find real savings, a lot of that just gets past service stores. And so we want to do. I mean, if there is a service we're making a good return on these businesses, we think it’s strategically a very important thing that we do own it and it does give us good returns, but remember we got profit sharing. So any savings we find automatically half of that is going to go back to the stores and frankly, as we find other opportunities for savings a lot of them we wind up passing just back through to them on pricing on the products that are going out. I wouldn’t try to run that up that margin up.
And then secondly on your international segment, how do you think about flow through on the growth in the royalty obviously you know in the supply chain international but the growth in the royalty is that is something like a 90, Jeff was asking this in a more general way but is that like a 90% flow through business that's just a structural contributor to that margin or is there something that will be different that won’t be that high?
The order magnitude is here in the right range.
Yes, on the global net unit growth now using a percentage of 46% that’s about the rate it’s been running at I think the last couple of years right in the middle of that range, can you just talk about the US side of the business, it’s been flat for I think for almost 10 years now…
And is it (inaudible)?
Well it seems like the unit economics have improved. You got a new store design. Your competition as you know are adding stores. It seems like it is right for US unit growth, within that 4% to 6% do you expect the US to grow its store base this year, why (inaudible) at this point and it seems like may be competitively it really should be notched up as the competition is growing and one must grow or die they say sometimes, so anyway you can comment on US unit growth?
You just gave my speech; I was referring to that franchisee that may be a meaning with our development department. I hope you are listening. I think the answer is we certainly want to get back at least to some modest growth in store counts in the US. The US population is still growing a 1% a year, I mean just so for starters, if we are not growing kind of 50 stores a year, our penetration rate on stores just on population growth in the US is going the wrong way. So yes we have to get back to some growth, you have seen the chart on profits are going in the right direction that is ultimately the best predictor of you know what is going to happen on store growth.
I am a great believer that contracts are a great reflection of understanding between two people but they got to reflect economic reality and so we are not big on kind of announcing stores under contract etcetera, stores get built because they should be built. I know they get return a good return to the people who are building them and so the long answer on it is yeah. We do want to get back some modest growth, we are certainly within that 4 to 6 looking at some growth in the domestic, but the overwhelming majority of our store growth is going to come from international going forward.
I have related question on, I guess US growth you talked about the shrinking size of share by Regional pizza chain, they maybe struggling have you ever thought of acquisition, is there an acquisition opportunity even from franchise to franchisees and if so how would, has that picked up?
Yeah, probably there's geographic overlap with existing franchisees. We've actually done some in international, some small ones where you could tuck in. The problem is our franchisees have the right to a define delivery area. So if you are doing an acquisition, you are going to have stores, you are going to be converting that are going to be in the delivery area of an existing franchisee and frankly if we think the sales are there and we think there's an opportunity to add another store to that area, the capital investment isn't that high, let's just build the store, do it right you know, have it with an operator who we already know.
So we've looked at it, there have been a few markets that we were so under penetrated in, in the US that we looked at could you do an acquisition and a conversion. I doubt you are going to see much. If you ever see anything in the US they are going to be very, very small. It’s going to be as much as anything because we are after the real estate. We are going into some small town, we are not in already and we buy out the local guy who is that main and main and flip the signs and (inaudible) but for the most part that's not going to be a real opportunity, might be a little bit more in international.
And maybe one quick follow-up on the structure of the domestic franchisee base you are still moving to more of a little bit consolidation within downward?
Yeah, we are down 250 to 300 franchises over the course of the last four or five years and that's been purposeful. We have a better system today. We are down in the range of a 1,000 franchisees. Our average stores per franchise have moved from something that was more in the 3 to 3.5 range to something that's now more in the 4 to 4.5 range of stores per franchisee and there is always going to be a place in the system for a single store operator and still half of our franchises own one store. It’s where we get talent. Our people coming up through the system and there's always going to be a place for those people in the system but if people are excited about where we are going and if they are not performing, if they are not running their store well enough, at some point we are going to look for somebody to own and operate that store that's more excited about the opportunity.
As you guys enter new geographies and continue to expand internationally, can you talk about some of the internal control that you have in place and the supply chain to kind of maintain good quality integrity?
Sure. We have a quality assurance team within our international business that is deployed around the world to go certify suppliers to inspect. We inspect every year; we inspect all of the commissaries that our franchises operate around the world. So we have a pretty extensive process in place to make sure that we protect the food safety and protect the brand around the world.
A question on the value proposition of pizza delivery because I think that was something that kind of got all the pizza delivery companies in trouble several years back as like the delivery charges. Everyone was adding delivery charges and kind of increasing the ticket and the affordability or the relative value versus other guiding options became less attractive but and over the past several years that changed dramatically and I think helped the industry a lot, can you talk about how important it is, what are the, I guess what are the key alternative segments that you measure and how important that is and where you feel you are from a relative value standpoint, are you kind of at steady state now or is there a room to actually improve that further?
First of all your set up is exactly right, getting value right again in this category is part of what's driven some growth again in the category and I think it was absolutely a very big part of why the category was stagnant. For about 10 years, I think our relative value to some burger chains in particular; I think got worse over the course of the decade and therein is the answer.
I mean the trading opportunity and what people are going to eat that item. It's all their QSR, you know, there is a lot of it. Certainly, some of it is eating at home but you know, if you look at most of the trading behavior, it's going to be with other QSR. And so we are looking at all the other major segments, sandwiches and hamburgers. If you think about the hamburger industry or the course of that decade they sharpen their pencils a lot on value. And I think the pizza category didn't do as good a job so I think that's absolutely been part of it.
And in terms of is there more --- I think still things that we can be doing, look at their pricing and Mike was talking about kind of the structure pricing, the local coupons and all the rest of it, and I still think there are ways we can get smarter about our pricing, I don't know though that, I would say there is big opportunity for kind of game changing shifts around value that I would think get dramatically accelerate the category more than it's been.
In terms of US unit growth, my understanding is that franchisee finance lending area has improve for the mid-size and larger franchisees but it's still really difficult for the one in two store operators but yet unit economics would suggest that economically, they should be growing because the returns to develop the new store look pretty good. What can you guys do in terms of incentives, your own balance sheet facilitating, franchisee lending programs with some of the lenders to assist them in accelerating that growth?
So, first thing I would say is and maybe even give you a little more detail around what is accessible out there today. Franchisees who wants to borrow million dollars or more is going to find a very good market out there right now for financing and that’s move from you know, almost nothing 24 months ago to pretty good a year ago to now that market has gotten very, very strong over the course of the past year, but you were also right, the small players still have very difficult time.
If it’s a single store franchisee who wants to open or buy their second store and they want to borrow a $100,000 or $200,000 that market is still tight. So it’s what we have done and what we have spent some time on is helping folks learn how to present their case, but my personal view is those banking relationships need to be local.
I don’t think you are going to see some of the big national players coming back in making $100,000 franchise loans. Again I think it’s a tough business model for them and I think a lot of them learn that. So, in terms of opening up kind of flood gates of centrally available capital to single store operators who want to borrow a $100,000; it’s mostly about teaching them how to build those relationships, how to position their business with those banks.
And I guess the last thing I would say is at some point they can (inaudible) out cash flow and that loan may not even be against the business, it may be the side they paid off their mortgage on their house and they put a mortgage back on their house. There is interplay into their personal financial situation when you are talking about those sorts of numbers, but part of what’s had to happen is they all had to dig out of the downturn like everybody else did and so their balance sheets are improving that is coming off of the system with time and with improving economics and so just the overall level of free cash flow and how much needs to be diverted to paying off all loans and even personal situations is improved. So it’s getting better for them but the market clearly has not that opened that up a lot for very small loans.
It is a question for Rich, and one on international market that wasn't mentioned that you haven’t been too aggressive is of course China, can you give us an update there, is there a new franchisee there or maybe to start with how many stores you have and where do you see the China business?
Sure, we are now right at about two years into a reset on the business in China after bringing a new franchisee partner and they have got a lot of hard yards behind them in terms of really putting the right foundation in place for the business there. So over that period of time, we have done quite a bit in terms of the real estate side of the business, you are getting out of some stores and some leases that were in the wrong places. We got some new stores opened, so made progress there we have revamped the menu and the pricing around the menu and also made some dramatic improvements in service.
So at this point in time, we got a couple of dozens stores in the market but I think a nice foundation to begin growing going forward. We had really positive forward momentum in the brand, the new stores that are opening, are at opening higher levels, order count and sales levels that we had seen in the past and the consumer there frankly is embracing this new image. We have opened pizza theatre store in China and it’s done very well. So, early days but good progress with our partner there.
Thanks, if I can have just one separate follow-up to Patrick actually, and not to be a dead horse on the US openings but can you discuss the bigger franchisees why aren't the bigger franchisees stepping up unit growth?
That's where we are getting openings now, that's where mostly it’s coming from, it’s from bigger franchisees.
So are there other closures because it’s still been a net flattish type of profile?
Yeah. Yeah. So at net flattish there have been almost as many closures as openings. Yeah I mean that's the answer and so we still had to go through some of the reset with some of the system. Look am I more optimistic today than I have been in the past, yeah, I'm I mean the unit economics are better, the balance sheets are better at least for the larger franchisees. The debt markets have opened back up. I guess what I'm saying though is the punch line as opposed to having to try to read between the lines is would I be modeling in really material domestic store growth yet? No. I think we are going to get back to some modest growth but this is going to ratchet up over time.
Hi, just had a couple of questions about your technology innovations thing. First, can you quantify the numbers as part of G&A and CapEx, and second are you finding ways to monetize that either now or in the future by making by having the franchisees pay for it themselves or possibly splitting it off to other brands?
Two parts to the question one is we don't really breakout how much we spend on IT expense. We have said about a third of our capital last year was going to go towards IT and it could be roughly the same. As far as monetizing it, we do charge our franchisees for both the point of sales system that we developed in-house, they pay for that and over the years we try to operate that on something that's close to a cost recovery basis. We are not trying to make money off from IT.
The deal that's been kind of made with franchisees is we will spend, we will invest, we are not going to make money here. We are going to make it off the royalties. On online ordering, we've fronted the money to develop it. We continue to front the money to develop Android apps and iPhone apps. We charge each franchisee $0.17 for each order that's placed online or digitally in some form that gives us a significant recovery, okay. That's the better part about the statements that you are not supposed to say. Lynn will chastise me later. Sorry about that. But we do charge our franchises and again we are trying to operate that on a cost recovery basis.
But it is not by the way. We still lose money on that you know and we are investing. We think it’s a strong competitive advantage and the other thing you asked was would we start offering that to other brands and the answer is absolutely not. That's competitive advantage and we absolutely will not give that to other brands.
A question for Rich. What's holding you back on Italy, the temple of pizza?
Yeah, long history there on Italy right. We look at new markets for entry and you know Jonathan we were talking about this a little bit earlier, you know, we look at scalability of the market you know can we operate profitably there and then also how accessible is the market as it relates to security and ability to transact, move money in and out and the challenge in Italy has been the profitability side of that equation. You know clearly it’s a huge pizza market but a very difficult place to operate a profitable chain pizza business and I think that's why you really don't see anybody in their doing it right now. It’s full of Mom & Pop operators which in many cases, operate under different set of rules than we would need to play by if we were to operate in that market.
Unidentified Company Representative
So the only other color I would put around that is I look to very hard at a conversion. When I was running international six, seven years ago, there was a great little chain that had about 50 units that they had terrific products, their service levels were great. In fact, one of the guys who would started it had apparently come to the US and got in to job working for us for a while so he can learn everything he could.
They’ve gone back, they were doing absolutely terrific job. I love the guys, I would have loved to have them as master franchisees and they were absolutely hemorrhaging cash. And at the end of looking at it, I said, you know, great news; you are doing a spectacular job. Bad news, I have no idea how to improve upon what you are doing. Don’t know how to fix this and that was kind of the last and we looked hard at it.
All right. Well thank you everybody. Truly appreciate your time and your interest in many of your cases, your investment.
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